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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES 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 53999
Phoenix, Arizona 85072-3999
(602) 250-1000
    
    86-05124311-4473
    
    ARIZONA PUBLIC SERVICE COMPANY
(An Arizona corporation)
400 North Fifth Street, P.O. Box 53999
Phoenix, 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 RegisteredPINNACLE WEST CAPITAL CORPORATION
    
    Common Stock,
    
    New York Stock ExchangeNo Par ValueARIZONA PUBLIC SERVICE COMPANY
    
    None
    
    None
 Securities registered pursuant to Section 12(g) of the Act:
  þ o
 þ o
  o þ
 o þ
  þ o
 þ o
 þ
  PINNACLE WEST CAPITAL CORPORATIONLarge 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 COMPANYLarge accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  PINNACLE WEST CAPITAL CORPORATION
    
    $3,085,816,962 as of June 30, 2008ARIZONA PUBLIC SERVICE COMPANY
    
    $0 as of June 30, 2008
  PINNACLE WEST CAPITAL CORPORATION
    
    100,990,779 sharesARIZONA PUBLIC SERVICE COMPANY
    
    Common Stock, $2.50 par value,
71,264,947 shares. Pinnacle West
Capital Corporation is the sole holder of Arizona Public Service Companys Common Stock.
     Arizona Public Service Company meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format allowed
under that General Instruction.




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##### 



TABLE OF CONTENTS
 PageGLOSSARY
    
    
    1PART I
    
    
    3Item 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    24Item 1B. Unresolved Staff Comments
    
    
    35Item 2. Properties
    
    
    35Item 3. Legal Proceedings
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders 
Supplemental Item
    
    
    3738Executive Officers of Pinnacle West
    
    
    38PART II
    
    
    41Item 5. Market for Registrants Common Equity, Pinnacle West Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    41Item 6. Selected Financial Data
    
    
    43Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    45Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    77Item 8. Financial Statements and Supplementary Data
    
    
    78Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    164Item 9A. Controls and Procedures
    
    
    164Item 9B. Other Information
    
    
    165PART III
    
    
    165Item 10. Directors, Executive Officers and Corporate Governance of Pinnacle West
    
    
    165Item 11. Executive Compensation
    
    
    165Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    165Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    167Item 14. Principal Accountant Fees and Services
    
    
    167PART IV
    
    
    169Item 15. Exhibits and Financial Statement Schedules
    
    
    169SIGNATURES
    
    
    208
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INTRODUCTION
 Filing Format
   
    
    Pinnacle West ConsolidatedThis section describes the financial condition and
results of operations of Pinnacle West and its subsidiaries on a consolidated basis.
It includes discussions of Pinnacle Wests regulated utility and non-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.
  
 PART I
 
 ITEM 1. BUSINESS
 OVERVIEW
 General
    3




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Business Segments
  
    
    the regulated electricity segment (accounting for 93% of operating revenues in
2008), 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
    
    the real estate segment (accounting for 4% of operating revenues in 2008), which
consists of SunCors real estate development and investment activities.
  APS ACC Proceedings
  Employees
  Available Information
 www.pinnaclewest.com
 www.pinnaclewest.com,
 4




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
    
    Corporate Governance Guidelines;
    
    Board Committee Summary;
    
    Charters for Pinnacle Wests Audit Committee, Corporate Governance Committee,
Finance, Nuclear and Operating Committee 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.
   Forward-Looking Statements
  
    
    state and federal regulatory and legislative decisions and actions, including the
outcome or timing of the pending rate case of APS;
    
    increases in our capital expenditures and operating costs and our ability to achieve
timely and adequate rate recovery of 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 expenditure reductions;
    
    volatile fuel and purchased power costs, including fluctuations in market prices for
natural gas, coal, uranium and other fuels used in our generating facilities,
availability of supplies of such commodities, and our ability to recover the costs of
such commodities;
    
    the outcome and resulting costs of regulatory, legislative and judicial proceedings,
both current and future, including those related to environmental matters and climate
change;
    
    the availability of sufficient water supplies to operate our generation facilities,
including as the result of drought conditions;
 5




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
    
    the potential for additional restructuring of the electric industry, including
decisions impacting wholesale competition and the introduction of retail electric
competition in Arizona;
    
    regional, national and international economic and market conditions, including the
strength of the housing, credit and financial 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 nuclear decommissioning trust, pension, and other
postretirement benefit plan assets, the amount of required contributions to Pinnacle
Wests pension plan and contributions to APS nuclear decommissioning trust funds, as
well as the reported costs 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 those principles 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 the cost of power supplies;
    
    risks inherent in the operation of nuclear facilities, such as environmental,
regulatory, health and financial risks, risk of 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s market 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 West and APS.
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REGULATION AND COMPETITION
 Retail
     Wholesale
 General
  7




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BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
 General
   Portfolio Resources
  Generation Facilities
  Capacity (kW)Coal:Units 1, 2 and 3 at Four Corners
    
    
    560,00015% owned Units 4 and 5 at Four Corners
    
    
    225,000Units 1, 2 and 3 at Cholla
    
    
    641,00014% owned Units 1, 2 and 3 at the Navajo Generating Station
    
    
    315,000Subtotal
    
    
    1,741,000Gas or Oil:Two steam units at Ocotillo and two steam units at Saguaro
    
    
    430,000Twenty-four combustion turbine units
    
    
    1,088,000Seven combined cycle units
    
    
    1,862,000Subtotal
    
    
    3,380,000Nuclear:29.1% owned or leased Units 1, 2 and 3 at Palo Verde
    
    
    1,147,122Solar
    
    
    5,816Total
    
    
    6,273,938
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Coal Fueled Generating Facilities
 Four Corners
 Cholla
 Navajo Generating Station
  Natural Gas Fueled Generating Facilities
  9




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Nuclear Generating Facility
 Palo Verde Nuclear Generating Station 
 Palo Verde Fuel Cycle 
 
    
    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.
  Spent Nuclear Fuel and Waste Disposal 
 Palo Verde Leases 
 Regulatory 
 NRC Inspection 
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##### Table of Contents



Nuclear Decommissioning Costs 
  Palo Verde Liability and Insurance Matters
 Alternative Generation Sources
  11




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Purchased Power Agreements
  12




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CapacityPurchased Power Agreement
    
    Dates Available
    
    (MW)Purchase Agreement (a)
    
    Year-round through February 2013
    
    Up to 90Purchase Agreement (b)
    
    Year-round through June 15, 2010
    
    
    238Exchange Agreement (c)
    
    May 15 to September 15 annually
through 2020
    
    
    480Tolling Agreement
    
    June 2007 through May 2017
    
    
    500Tolling Agreement
    
    June 2010 through October 2019
    
    
    560Day-Ahead Call Option Agreement
    
    June 2007 through September 2015
(summer seasons)
    
    
    500Day-Ahead Call Option Agreement
    
    June 2007 through summer 2016
    
    
    150Wind Agreement
    
    December 2006 through December 2026
    
    
    90Wind Agreement
    
    July 19, 2009 through April 2039
    
    
    100Landfill Gas Agreement
    
    Deliveries expected to commence in
2009; expires 2029
    
    
    3Landfill Gas Agreement
    
    Deliveries expected to commence in
September 2009; expires 2029
    
    
    3Solar Agreement (d)
    
    Deliveries expected to commence in
2012; expires 2042
    
    
    250Geothermal Agreement
    
    January 2006 through 2029
    
    
    12Biomass 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 is adjusted annually. Effective June 16, 2007, the seller, Salt River
Project, reduced the capacity available to APS by 150 MW. 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 from PacifiCorp during the summer peak season (from May 15 to September
15) and APS returns a like amount of electricity to PacifiCorp during the winter season (from
October 15 to February 15). Until 2020, APS and PacifiCorp each has 480 MW 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 to PacifiCorp each year through October 31, 2020.(d)
    
    See Alternative Generation Sources above for more information.  Reserve Margin
  13




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Resource Plan
  
    
    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 or acquisition of peaking capacity and/or potential additional
deployment of demand response opportunities.
    14




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Transmission and Distribution Facilities
  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
   15




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Environmental Matters
 EPA Environmental Regulation
 Regional Haze Rules
     16




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Mercury
    17




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Federal Implementation Plan
 Four Corners FIP
  18




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Navajo Generating Station FIP
  Superfund nd
  Manufactured Gas Plant Sites
 Navajo Nation Environmental Issues
   19




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Water Supply
    20




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Climate Change
 Legislative and Regulatory Initiatives.
 21




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Regional Initiative.
 Company Response to Climate Change Initiatives.
  22




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(www.pinnaclewest.com)
 BUSINESS OF SUNCOR DEVELOPMENT COMPANY
      BUSINESS OF OTHER SUBSIDIARIES
  23




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ITEM 1A. RISK FACTORS
  APS is subject to comprehensive government regulation by several federal, state and local
regulatory agencies that could have a material adverse impact on its business, liquidity and
results of operations.
   24




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APS is subject to numerous environmental laws and regulations that may increase its cost of
operations, impact its business plans, or expose it to environmental liabilities.
    25




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Concern over climate change could result in significant legislative and regulatory efforts to
limit greenhouse gas emissions or related litigation, which may increase APS cost of operations.
 2 2
 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.
   26




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The operation of power generation facilities involves risks that could result in unscheduled
power outages or reduced output, which could materially affect our results of operations.
  The ownership and operation of power generation and transmission facilities on Indian lands
could result in uncertainty related to continued easements and rights-of-way, which could have a
significant impact on our business.
  Deregulation or restructuring of the electric industry may result in increased competition,
which could have a significant adverse impact on our business and our results of operations.
   27




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Changes in technology may adversely affect our business.
  Our results of operations can be adversely affected by weather conditions.
   Our results of operations can be adversely affected by current economic conditions.
  The lack of access to sufficient supplies of water could have a material adverse impact on our
business and results of operations.
  Our cash flow largely depends on the performance of our subsidiaries.
 28




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Our ability to meet our debt service obligations could be adversely affected because our debt
securities are structurally subordinated to the debt securities and other obligations of our
subsidiaries.
  Our inability to reduce capital expenditures could materially and adversely affect our
business, financial condition and results of operation.
  Financial market disruptions may increase our financing costs or limit our access to the
credit markets, which may adversely affect our liquidity and our ability to implement our financial
strategy.
  
    
    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;
 29




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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.
   
    
    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 would reduce 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.
    30




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A reduction in our credit ratings could materially and adversely affect our business,
financial condition and results of operations.
  The use of derivative contracts in the normal course of our business could result in financial
losses that negatively impact our results of operations.
   Changing interest rates and market conditions could result in financial losses that negatively
impact our results of operations.
  31




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The market price of our common stock may be volatile.
  
    
    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 and investors;
    
    developments generally affecting industries in which we operate, particularly the
energy distribution and energy generation industries;
    
    announcements by us or our competitors of significant contracts, acquisitions, joint
marketing relationships, joint ventures 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.
  Our stock price could be affected because a substantial number of shares of our common stock
could be available for sale in the future.
  32




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We may enter into credit and other agreements from time to time that restrict our ability to
pay dividends.
  Certain provisions of our articles of incorporation and bylaws and of Arizona law make it
difficult for shareholders to change the composition of our board and may discourage takeover
attempts.
  
    
    restrictions on our ability to engage in a wide range of business combination
transactions with an interested shareholder (generally, any person who owns 10% or
more of our outstanding voting power or any of our affiliates or 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 stock from 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 our President may call a
special meeting of shareholders;
    
    advance notice procedures for nominating candidates to our Board of Directors or
presenting matters at shareholder meetings;
    
    shareholders may only remove a director with or without cause by a majority vote at
a special meeting of shareholders;
    
    the ability of the Board of Directors to increase the size of the Board and fill
vacancies on the Board, whether resulting 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 to determine the price and, with respect to preferred
stock, the other terms, including preferences and voting rights, of those shares
without shareholder approval.
   33




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SunCors business and financial performance could continue to be adversely affected by a
variety of factors affecting the real estate market.
  
    
    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 a home, 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 increase costs and delay deliveries; and
    
    government regulations, which could increase the cost and limit the availability of
SunCors development, homebuilding and commercial projects.
    34




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ITEM 1B. UNRESOLVED STAFF COMMENTS
 .
 35




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ITEM 2. PROPERTIES
 Information Regarding Our Properties
    Real Estate Segment Properties
  36




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ITEM 3. LEGAL PROCEEDINGS
    
 ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
  38




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SUPPLEMENTAL ITEM.
EXECUTIVE OFFICERS OF PINNACLE WEST
  Name
    
    Age at February 20, 2009
    
    Position(s) at February 20, 2009William J. Post
    
    
    58
    
    
    Chairman of the Board and
Chief Executive Officer (1)Donald E. Brandt
    
    
    54
    
    
    President and Chief
Operating Officer, and
Chief Executive Officer of
APS (1)James R. Hatfield
    
    
    51
    
    
    Senior Vice President and
Chief Financial OfficerJohn R. Denman
    
    
    66
    
    
    Senior Vice President,
Fossil Operations, APSRandall K. Edington
    
    
    55
    
    
    Executive Vice President
and Chief Nuclear Officer,
APSChris N. Froggatt
    
    
    51
    
    
    Vice President and TreasurerBarbara M. Gomez
    
    
    54
    
    
    Vice President, Controller
and Chief Accounting
OfficerNancy C. Loftin
    
    
    55
    
    
    Senior Vice President,
General Counsel and
SecretaryDonald G. Robinson
    
    
    55
    
    
    President and Chief
Operating Officer, APSLori S. Sundberg
    
    
    45
    
    
    Vice President, Human
Resources, APSSteven M. Wheeler
    
    
    60
    
    
    Executive Vice President,
Customer Service and
Regulation, APS
 
 (1)
    
    Member of the Board of Directors.   39




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  
 Dividends2008
    
    High
    
    Low
    
    Close
    
    Per Share1st Quarter
    
    $
    42.92
    
    
    $
    34.08
    
    
    $
    35.08
    
    
    $
    0.5252nd Quarter
    
    
    37.39
    
    
    
    30.26
    
    
    
    30.77
    
    
    
    0.5253rd Quarter
    
    
    37.88
    
    
    
    30.34
    
    
    
    34.41
    
    
    
    0.5254th Quarter
    
    
    35.83
    
    
    
    26.27
    
    
    
    32.13
    
    
    
    0.525
 Dividends2007
    
    High
    
    Low
    
    Close
    
    Per Share1st Quarter
    
    $
    51.67
    
    
    $
    46.43
    
    
    $
    48.25
    
    
    $
    0.5252nd Quarter
    
    
    50.68
    
    
    
    39.38
    
    
    
    39.85
    
    
    
    0.5253rd Quarter
    
    
    41.76
    
    
    
    36.79
    
    
    
    39.51
    
    
    
    0.5254th Quarter
    
    
    44.50
    
    
    
    39.04
    
    
    
    42.41
    
    
    
    0.525
   Common Stock Dividends
(Dollars in Thousands)
 Quarter
    
    2008
    
    20071st Quarter
    
    $
    42,500
    
    
    $
    42,5002nd Quarter
    
    
    42,500
    
    
    
    42,5003rd Quarter
    
    
    42,500
    
    
    
    42,5004th Quarter
    
    
    42,500
    
    
    
    42,500
  42




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Issuer Purchases of Equity Securities
  Total
    
    
    
    
    
    
    Total Number ofNumber of
    
    
    
    
    
    
    Shares Purchased
    
    
    Maximum Number ofShares
    
    
    Average
    
    
    as Part of Publicly
    
    
    Shares that May Yet BePurchased
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Purchased Under thePeriod
    
    (1)
    
    
    per Share
    
    
    or Programs
    
    
    Plans or ProgramsOctober 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 of restricted stock. 43




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ITEM 6. SELECTED FINANCIAL DATA
PINNACLE WEST CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
 2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(dollars in thousands, except per share amounts)OPERATING RESULTSOperating revenues:Regulated electricity segment
    
    $
    3,127,383
    
    
    $
    2,918,163
    
    
    $
    2,635,036
    
    
    $
    2,237,145
    
    
    $
    2,035,247Real estate segment
    
    
    131,067
    
    
    
    212,586
    
    
    
    399,798
    
    
    
    338,031
    
    
    
    350,315Marketing and trading (a)
    
    
    66,897
    
    
    
    138,247
    
    
    
    136,748
    
    
    
    179,895
    
    
    
    227,040Other revenues
    
    
    41,729
    
    
    
    48,018
    
    
    
    36,172
    
    
    
    61,221
    
    
    
    42,816Total operating revenues
    
    $
    3,367,076
    
    
    $
    3,317,014
    
    
    $
    3,207,754
    
    
    $
    2,816,292
    
    
    $
    2,655,418Income from continuing operations (b)
    
    $
    213,557
    
    
    $
    298,744
    
    
    $
    316,265
    
    
    $
    227,288
    
    
    $
    242,887Discontinued operations  net of income
taxes (c)
    
    
    28,568
    
    
    
    8,399
    
    
    
    10,990
    
    
    
    (51,021
    )
    
    
    308Net income
    
    $
    242,125
    
    
    $
    307,143
    
    
    $
    327,255
    
    
    $
    176,267
    
    
    $
    243,195COMMON STOCK DATABook value per share  year-end
    
    $
    34.16
    
    
    $
    35.15
    
    
    $
    34.48
    
    
    $
    34.58
    
    
    $
    32.14Earnings (loss) per weighted-average
common share outstanding:Continuing operations  basic
    
    $
    2.12
    
    
    $
    2.98
    
    
    $
    3.18
    
    
    $
    2.36
    
    
    $
    2.66Net income  basic
    
    $
    2.40
    
    
    $
    3.06
    
    
    $
    3.29
    
    
    $
    1.83
    
    
    $
    2.66Continuing operations  diluted
    
    $
    2.12
    
    
    $
    2.96
    
    
    $
    3.16
    
    
    $
    2.35
    
    
    $
    2.65Net income  diluted
    
    $
    2.40
    
    
    $
    3.05
    
    
    $
    3.27
    
    
    $
    1.82
    
    
    $
    2.66Dividends declared per share
    
    $
    2.10
    
    
    $
    2.10
    
    
    $
    2.025
    
    
    $
    1.925
    
    
    $
    1.825Weighted-average common shares
outstanding  basic
    
    
    100,690,838
    
    
    
    100,255,807
    
    
    
    99,417,008
    
    
    
    96,483,781
    
    
    
    91,396,904Weighted-average common shares
outstanding  diluted
    
    
    100,964,920
    
    
    
    100,834,871
    
    
    
    100,010,108
    
    
    
    96,589,949
    
    
    
    91,532,473BALANCE SHEET DATATotal assets
    
    $
    11,620,093
    
    
    $
    11,162,209
    
    
    $
    10,817,900
    
    
    $
    10,588,485
    
    
    $
    9,875,456Liabilities and equity:Current liabilities
    
    $
    1,505,928
    
    
    $
    1,344,449
    
    
    $
    923,338
    
    
    $
    1,608,863
    
    
    $
    1,590,460Long-term debt less current maturities
    
    
    3,031,603
    
    
    
    3,127,125
    
    
    
    3,232,633
    
    
    
    2,608,455
    
    
    
    2,584,985Deferred credits and other
    
    
    3,636,583
    
    
    
    3,159,024
    
    
    
    3,215,813
    
    
    
    2,946,203
    
    
    
    2,749,815Total liabilities
    
    
    8,174,114
    
    
    
    7,630,598
    
    
    
    7,371,784
    
    
    
    7,163,521
    
    
    
    6,925,260Common stock equity
    
    
    3,445,979
    
    
    
    3,531,611
    
    
    
    3,446,116
    
    
    
    3,424,964
    
    
    
    2,950,196Total 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 2004 through 2008. See Note 22.(b)
    
    Includes a $32 million after tax real estate impairment charge in 2008. (See Note 23.) Also
includes regulatory disallowance 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. 44




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##### Table of Contents



SELECTED FINANCIAL DATA
ARIZONA PUBLIC SERVICE COMPANY
 2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(dollars in thousands)OPERATING RESULTSElectric operating revenues
    
    $
    3,133,496
    
    
    $
    2,936,277
    
    
    $
    2,658,513
    
    
    $
    2,270,793
    
    
    $
    2,197,121Fuel and purchased power costs
    
    
    1,289,883
    
    
    
    1,151,392
    
    
    
    969,767
    
    
    
    688,982
    
    
    
    763,254Other operating expenses
    
    
    1,408,213
    
    
    
    1,358,890
    
    
    
    1,290,804
    
    
    
    1,200,198
    
    
    
    1,104,886Operating income
    
    
    435,400
    
    
    
    425,995
    
    
    
    397,942
    
    
    
    381,613
    
    
    
    328,981Other income (deductions)
    
    
    836
    
    
    
    20,870
    
    
    
    27,584
    
    
    
    (69,171
    )
    
    
    15,328Interest deductions  net of
AFUDC
    
    
    173,892
    
    
    
    162,925
    
    
    
    155,796
    
    
    
    141,963
    
    
    
    144,682Net income
    
    $
    262,344
    
    
    $
    283,940
    
    
    $
    269,730
    
    
    $
    170,479
    
    
    $
    199,627BALANCE SHEET DATATotal assets
    
    $
    10,963,577
    
    
    $
    10,321,402
    
    
    $
    9,948,766
    
    
    $
    9,143,643
    
    
    $
    8,069,564Liabilities and equity:Common stock equity
    
    $
    3,339,150
    
    
    $
    3,351,441
    
    
    $
    3,207,473
    
    
    $
    2,985,225
    
    
    $
    2,232,402Long-term debt less current
maturities
    
    
    2,850,242
    
    
    
    2,876,881
    
    
    
    2,877,502
    
    
    
    2,479,703
    
    
    
    2,267,094Total capitalization
    
    
    6,189,392
    
    
    
    6,228,322
    
    
    
    6,084,975
    
    
    
    5,464,928
    
    
    
    4,499,496Current liabilities
    
    
    1,267,768
    
    
    
    1,055,706
    
    
    
    806,556
    
    
    
    1,021,084
    
    
    
    1,154,702Deferred credits and other
    
    
    3,506,417
    
    
    
    3,037,374
    
    
    
    3,057,235
    
    
    
    2,657,631
    
    
    
    2,415,366Total liabilities and equity
    
    $
    10,963,577
    
    
    $
    10,321,402
    
    
    $
    9,948,766
    
    
    $
    9,143,643
    
    
    $
    8,069,564
 45




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTRODUCTION
  OVERVIEW
       46




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##### Table of Contents



PINNACLE WEST CONSOLIDATED 
EARNINGS CONTRIBUTION BY BUSINESS SEGMENT
  
    
    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.
  2008
    
    
    2007
    
    
    2006Regulated electricity segment
    
    $
    256
    
    
    $
    274
    
    
    $
    259Real estate segment (a)
    
    
    (49
    )
    
    
    14
    
    
    
    50All other (b)
    
    
    7
    
    
    
    11
    
    
    
    7Income from continuing operations
    
    
    214
    
    
    
    299
    
    
    
    316Income (loss) from discontinued
operations  net of tax:Real estate segment (c)
    
    
    23
    
    
    
    9
    
    
    
    10All other (b)
    
    
    5
    
    
    
    (1
    )
    
    
    1Net income
    
    $
    242
    
    
    $
    307
    
    
    $
    327
 47




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##### Table of Contents



(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 discontinued operations for 2008 is primarily related to the
resolution of certain tax issues associated with the sale of Silverhawk in 2005. 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
  48




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##### Table of Contents



Increase (Decrease)Pretax
    
    
    After TaxRegulated 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
    
    
    $
    95Decreased deferred fuel and purchased power costs related to
higher Base Fuel Rate
    
    
    (141
    )
    
    
    (86
    )Transmission rate increases (including related retail rates)
    
    
    31
    
    
    
    19Lower mark-to-market valuations of fuel and purchased power
contracts related to changes in market prices, net of related
PSA deferrals
    
    
    (14
    )
    
    
    (9
    )Regulatory disallowance in 2007
    
    
    14
    
    
    
    8Higher retail sales primarily due to customer growth,
excluding weather effects, partially offset by lower
average usage
    
    
    21
    
    
    
    13Effects 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
    
    
    
    
    
    
    30Income 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
    
    
    
    5Decrease 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
    
    
    
    6Decrease in income from continuing operations
    
    $
    (171
    )
    
    
    (85
    )Increase in real estate segment income from discontinued operations
primarily related to a 2008 commercial property sale
    
    
    
    
    
    
    14Increase in other income from discontinued operations primarily
related to the resolution in 2008 of certain tax issues associated
with the sale of Silverhawk in 2005
    
    
    
    
    
    
    6Decrease in net income
    
    
    
    
    
    $
    (65
    )
 Regulated Electricity Segment Revenues
  49




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##### Table of Contents




    
    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 of lower 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
  
    
    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
  2007 Compared with 2006
  50




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##### Table of Contents



Increase (Decrease)Pretax
    
    
    After TaxRegulated electricity segment:Higher retail sales primarily due to customer growth, excluding
weather effects
    
    $
    46
    
    
    $
    28Effects of weather on retail sales
    
    
    37
    
    
    
    23Impacts of retail rate increase effective July 1, 2007:Revenue increase related to higher Base Fuel Rate
    
    
    185
    
    
    
    113Decreased deferred fuel and purchased power costs related to
higher Base Fuel Rate
    
    
    (171
    )
    
    
    (104
    )Non-fuel rate increase
    
    
    6
    
    
    
    4Net 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
    
    
    
    70Mark-to-market fuel and purchased power costs,
net of related deferred fuel and purchased power costs
    
    
    18
    
    
    
    11Regulatory disallowance (see Note 3)
    
    
    (14
    )
    
    
    (8
    )Operations and maintenance increases primarily due to:Increased generation costs, including increased maintenance
and overhauls and Palo Verde 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
    
    
    
    
    
    
    13Income tax credits resolved in 2006 related to prior years
    
    
    
    
    
    
    (14
    )Miscellaneous items, net
    
    
    6
    
    
    
    (3
    )Increase in regulated electricity segment net income
    
    
    34
    
    
    
    15Lower real estate segment income from continuing operations
primarily due to:Lower sales of residential property resulting from the continued
slowdown in the western United 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 gains resulting from changes in forward prices
and higher unit margins
    
    
    6
    
    
    
    3Other miscellaneous items, net
    
    
    (2
    )
    
    
    1Decrease 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
    )
 51




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##### Table of Contents



Regulated Electricity Segment Revenues
  
    
    a $191 million increase in retail revenues due to a rate increase effective July 1,
2007;
    
    a $60 million increase in retail revenues primarily related to customer growth,
excluding weather effects;
    
    a $50 million increase in retail revenues due to the effects of weather;
    
    a $3 million increase in revenues from Off-System Sales due to higher prices and
volumes;
    
    a $35 million decrease in retail revenues related to recovery of PSA deferrals,
which had no earnings effect because of amortization of the same amount recorded as
fuel and purchased power expense (see Note 3); and
    
    a $14 million net increase due to miscellaneous factors.
 Real Estate Segment Revenues
  
    
    a $167 million decrease in residential property sales due to the continued slowdown
in western United States real estate markets; and
    
    a $20 million decrease primarily due to lower sales of land parcels.
 All Other Revenues
  LIQUIDITY AND CAPITAL RESOURCES  Pinnacle West Consolidated
 Cash Flows
  52




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##### Table of Contents



2008
    
    
    2007
    
    
    2006Net cash flow provided by operating activities
    
    $
    814
    
    
    $
    658
    
    
    $
    394Net cash flow used for investing activities
    
    
    (815
    )
    
    
    (873
    )
    
    
    (569
    )Net cash flow provided by financing activities
    
    
    51
    
    
    
    185
    
    
    
    108Net Increase (decrease) in cash and cash equivalents
    
    $
    50
    
    
    $
    (30
    )
    
    $
    (67
    )
 2008 Compared with 2007
    2007 Compared with 2006
    Liquidity
 Capital Expenditure Requirements
  53




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##### Table of Contents



CAPITAL EXPENDITURES
 Actual
    
    
    Estimated2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011APSDistribution
    
    $
    357
    
    
    $
    372
    
    
    $
    340
    
    
    $
    276
    
    
    $
    266
    
    
    $
    356Generation (a)
    
    
    176
    
    
    
    353
    
    
    
    310
    
    
    
    288
    
    
    
    274
    
    
    
    319Transmission
    
    
    113
    
    
    
    138
    
    
    
    163
    
    
    
    275
    
    
    
    99
    
    
    
    185Other (b)
    
    
    16
    
    
    
    37
    
    
    
    43
    
    
    
    44
    
    
    
    37
    
    
    
    50Subtotal
    
    
    662
    
    
    
    900
    
    
    
    856
    
    
    
    883
    
    
    
    676
    
    
    
    910SunCor (c)
    
    
    201
    
    
    
    161
    
    
    
    41
    
    
    
    14
    
    
    
    70
    
    
    
    175Other
    
    
    7
    
    
    
    3
    
    
    
    7
    
    
    
    7
    
    
    
    3
    
    
    
    3Total
    
    $
    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 and 2011.(b)
    
    Primarily information systems and facilities projects.(c)
    
    Consists primarily of capital expenditures for residential, land development
and retail and office building construction reflected in Real estate investments and
Capital expenditures on the Consolidated Statements of Cash Flows.    54




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##### Table of Contents



Pinnacle West (Parent Company)
      55




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##### Table of Contents



APS
   56




---



##### Table of Contents



Other
Financing Matters 
   Other Subsidiaries
 SunCor
 57




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##### Table of Contents



El
Dorado
 APSES
 Debt Provisions
  58




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##### Table of Contents



Credit Ratings
  Moodys
    
    Standard & Poors
    
    FitchPinnacle WestSenior unsecured (a)
    
    Baa3 (P)
    
    BB+ (prelim)
    
    
    N/ACommercial paper
    
    P
    -3
    
    
    
    A-3
    
    
    
    F3Outlook
    
    Stable
    
    Stable
    
    NegativeAPSSenior unsecured
    
    Baa2
    
    BBB-
    
    BBBSecured lease
obligation bonds
    
    Baa2
    
    BBB-
    
    BBBCommercial paper
    
    P
    -2
    
    
    
    A-3
    
    
    
    F3Outlook
    
    Stable
    
    Stable
    
    Stable
 59




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##### Table of Contents



(a)
    
    Pinnacle West has a shelf registration under SEC Rule 415. Pinnacle West
currently has no outstanding, rated senior unsecured 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
   Guarantees and Letters of Credit
  Contractual Obligations
  60




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##### Table of Contents



2010-
    
    
    2012-2009
    
    
    2011
    
    
    2013
    
    
    Thereafter
    
    
    TotalLong-term debt payments,
including interest: (a)APS
    
    $
    182
    
    
    $
    957
    
    
    $
    646
    
    
    $
    3,549
    
    
    $
    5,334SunCor
    
    
    178
    
    
    
    4
    
    
    
    2
    
    
    
    
    
    
    
    184Pinnacle West
    
    
    10
    
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    197Total long-term debt payments,
including interest
    
    
    370
    
    
    
    1,148
    
    
    
    648
    
    
    
    3,549
    
    
    
    5,715Short-term debt payments,
including interest (b)
    
    
    672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    672Purchased power and fuel
commitments (c)
    
    
    449
    
    
    
    651
    
    
    
    777
    
    
    
    6,053
    
    
    
    7,930Operating lease payments
    
    
    82
    
    
    
    147
    
    
    
    132
    
    
    
    135
    
    
    
    496Nuclear decommissioning
funding requirements
    
    
    22
    
    
    
    49
    
    
    
    49
    
    
    
    185
    
    
    
    305Purchase obligations (d)
    
    
    69
    
    
    
    76
    
    
    
    33
    
    
    
    172
    
    
    
    350Minimum pension funding
requirement (e)
    
    
    36
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    61Total 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 on variable-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 respective revolving lines of credit (see Note 5).(c)
    
    Our purchased power and fuel commitments include purchases of
coal, electricity, natural gas, renewable energy
and nuclear 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.  CRITICAL ACCOUNTING POLICIES
  61




---



##### Table of Contents



Regulatory Accounting
    Pensions and Other Postretirement Benefit Accounting
   62




---



##### Table of Contents



Increase (Decrease)Impact on
    
    Impact onPension
    
    PensionActuarial Assumption (a)
    
    Liability
    
    ExpenseDiscount rate:Increase 1%
    
    $
    (241
    )
    
    $
    (8
    )Decrease 1%
    
    
    277
    
    
    
    14Expected 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 by one percentage point.  Increase (Decrease)Impact on Other
    
    Impact on OtherPostretirement Benefit
    
    PostretirementActuarial Assumption (a)
    
    Obligation
    
    Benefit ExpenseDiscount rate:Increase 1%
    
    $
    (90
    )
    
    $
    (5
    )Decrease 1%
    
    
    104
    
    
    
    5Health care cost trend
rate (b):Increase 1%
    
    
    103
    
    
    
    9Decrease 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 by one percentage point.(b)
    
    This assumes a 1% change in the initial and ultimate health care cost trend rate.  Derivative Accounting
  63




---



##### Table of Contents



Fair Value Measurements
   Real Estate Investment Impairments
   64




---



##### Table of Contents



OTHER ACCOUNTING MATTERS
  
    
    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 Is Not Active
      65




---



##### Table of Contents



FACTORS AFFECTING OUR FINANCIAL OUTLOOK
 Factors Affecting Operating Revenues, Fuel and Purchased Power Costs
 General
 Rate Proceedings
 Fuel and Purchased Power Costs
 Customer and Sales Growth
 66




---



##### Table of Contents



Weather
 Wholesale Market
 Other Factors Affecting Financial Results
 Operations and Maintenance Expenses
 Depreciation and Amortization Expenses
 Property Taxes
 Interest Expense
 Climate Change
 67




---



##### Table of Contents



Retail Competition
 Subsidiaries
  General
 Market Risks
  Interest Rate and Equity Risk
   68




---



##### Table of Contents



Pinnacle
West  Consolidated
 Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2008
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2009
    
    
    2.24
    %
    
    $
    670,469
    
    
    
    3.88
    %
    
    $
    173,619
    
    
    
    4.62
    %
    
    $
    4,0272010
    
    
    
    
    
    
    
    
    
    
    3.99
    %
    
    
    2,042
    
    
    
    5.66
    %
    
    
    1,1372011
    
    
    
    
    
    
    
    
    
    
    6.22
    %
    
    
    2,259
    
    
    
    6.23
    %
    
    
    576,2502012
    
    
    
    
    
    
    
    
    
    
    6.00
    %
    
    
    16
    
    
    
    6.50
    %
    
    
    376,3382013
    
    
    
    
    
    
    
    
    
    
    6.00
    %
    
    
    1,864
    
    
    
    6.00
    %
    
    
    231Years thereafter
    
    
    
    
    
    
    
    
    
    
    8.30
    %
    
    
    539,145
    
    
    
    5.64
    %
    
    
    1,540,229Total
    
    
    
    
    
    $
    670,469
    
    
    
    
    
    
    $
    718,945
    
    
    
    
    
    
    $
    2,498,212Fair value
    
    
    
    
    
    $
    670,469
    
    
    
    
    
    
    $
    718,945
    
    
    
    
    
    
    $
    2,107,635
 Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2007
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2008
    
    
    5.54
    %
    
    $
    340,661
    
    
    
    7.33
    %
    
    $
    159,337
    
    
    
    4.65
    %
    
    $
    4,4362009
    
    
    
    
    
    
    
    
    
    
    7.20
    %
    
    
    71,054
    
    
    
    5.76
    %
    
    
    1,0502010
    
    
    
    
    
    
    
    
    
    
    9.20
    %
    
    
    201
    
    
    
    5.71
    %
    
    
    1,1042011
    
    
    
    
    
    
    
    
    
    
    8.91
    %
    
    
    2,284
    
    
    
    6.23
    %
    
    
    576,2182012
    
    
    
    
    
    
    
    
    
    
    9.50
    %
    
    
    103
    
    
    
    6.50
    %
    
    
    376,293Years thereafter
    
    
    
    
    
    
    
    
    
    
    3.77
    %
    
    
    567,239
    
    
    
    5.64
    %
    
    
    1,540,462Total
    
    
    
    
    
    $
    340,661
    
    
    
    
    
    
    $
    800,218
    
    
    
    
    
    
    $
    2,499,563Fair value
    
    
    
    
    
    $
    340,661
    
    
    
    
    
    
    $
    800,218
    
    
    
    
    
    
    $
    2,414,301
  69




---



##### Table of Contents



APS
 Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2008
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2009
    
    
    2.09
    %
    
    $
    521,684
    
    
    
    
    
    
    $
    
    
    
    
    5.62
    %
    
    $
    8742010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.60
    %
    
    
    1,0122011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.37
    %
    
    
    401,2082012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.50
    %
    
    
    376,3252013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.00
    %
    
    
    231Years thereafter
    
    
    
    
    
    
    
    
    
    
    8.30
    %
    
    
    539,145
    
    
    
    5.64
    %
    
    
    1,540,229Total
    
    
    
    
    
    $
    521,684
    
    
    
    
    
    
    $
    539,145
    
    
    
    
    
    
    $
    2,319,879Fair value
    
    
    
    
    
    $
    521,684
    
    
    
    
    
    
    $
    539,145
    
    
    
    
    
    
    $
    1,935,160
 Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2007
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2008
    
    
    5.36
    %
    
    $
    218,000
    
    
    
    
    
    
    $
    
    
    
    
    5.66
    %
    
    $
    9782009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.60
    %
    
    
    9342010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.59
    %
    
    
    1,0122011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.37
    %
    
    
    401,2082012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.50
    %
    
    
    376,293Years thereafter
    
    
    
    
    
    
    
    
    
    
    3.76
    %
    
    
    565,855
    
    
    
    5.64
    %
    
    
    1,540,462Total
    
    
    
    
    
    $
    218,000
    
    
    
    
    
    
    $
    565,855
    
    
    
    
    
    
    $
    2,320,887Fair value
    
    
    
    
    
    $
    218,000
    
    
    
    
    
    
    $
    565,855
    
    
    
    
    
    
    $
    2,235,624
 Commodity Price Risk
   70




---



##### Table of Contents



2008
    
    
    2007Mark-to-market of net positions at beginning of year
    
    $
    40
    
    
    $
    15Recognized 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
    )
    
    
    55Recognized 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.  TotalfairSource of Fair Value
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Years thereafter
    
    
    valuePrices 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
    )
  71




---



##### Table of Contents



December 31, 2008
    
    
    December 31, 2007Gain (Loss)
    
    
    Gain (Loss)Price Up 10%
    
    
    Price Down 10%
    
    
    Price Up 10%
    
    
    Price Down 10%Mark-to-market changes reported in:EarningsElectricity
    
    $
    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 hypothetical price movements would substantially
offset the impact that these same price movements would have on the physical exposures
being hedged. To the extent the amounts are eligible for inclusion in the PSA, the
amounts are recorded as either a regulatory asset or liability. Credit Risk
  ARIZONA
PUBLIC SERVICE COMPANY  RESULTS OF OPERATIONS
 Regulatory Matters
  2008 Compared with 2007
  72




---



##### Table of Contents



Increase (Decrease)Pretax
    
    
    After TaxImpacts of retail rate increase effective July 1, 2007 and
transmission rate increases:Retail revenue increase primarily related to higher Base Fuel
Rate
    
    $
    156
    
    
    $
    95Decreased deferred fuel and purchased power costs related to
higher Base Fuel Rate
    
    
    (141
    )
    
    
    (86
    )Transmission rate increases (including related retail rates)
    
    
    31
    
    
    
    19Lower mark-to-market valuations of fuel and purchased power
contracts related to changes in market prices, net of related
PSA deferrals
    
    
    (14
    )
    
    
    (9
    )Regulatory disallowance in 2007
    
    
    14
    
    
    
    8Higher retail sales primarily due to customer growth,
excluding weather effects, partially offset by lower
average usage
    
    
    21
    
    
    
    13Effects 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
    
    
    
    
    
    
    29Income 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
    )
  
    
    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;
 73




---



##### Table of Contents




    
    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 of lower amortization of the same amount recorded
as fuel and purchased power expense; and
    
    a $13 million net increase due to miscellaneous factors.
 2007 Compared with 2006
  74




---



##### Table of Contents



Increase (Decrease)Pretax
    
    
    After TaxHigher retail sales primarily due to customer growth, excluding
weather effects
    
    $
    46
    
    
    $
    28Effects of weather on retail sales
    
    
    37
    
    
    
    23Impacts of retail rate increase effective July 1, 2007:Revenue increase related to higher Base Fuel Rate
    
    
    185
    
    
    
    113Decreased deferred fuel and purchased power costs related to
higher Base Fuel Rate
    
    
    (171
    )
    
    
    (104
    )Non-fuel rate increase
    
    
    6
    
    
    
    4Net 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
    
    
    
    70Mark-to-market fuel and purchased power costs,
net of related deferred fuel and purchased power costs
    
    
    18
    
    
    
    11Regulatory disallowance
    
    
    (14
    )
    
    
    (8
    )Operations and maintenance increases primarily due to:Increased generation costs, including increased maintenance
and overhauls and Palo Verde performance
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
    
    
    
    
    
    
    11Income tax credits resolved in 2006 related to prior years
    
    
    
    
    
    
    (11
    )Higher interest expense, net of capitalized financing costs,
primarily due to higher debt balances and higher rates
    
    
    (7
    )
    
    
    (4
    )Lower marketing and trading contribution primarily due to
lower mark-to-market gains because of changes in forward
prices
    
    
    (7
    )
    
    
    (4
    )Other miscellaneous items, net
    
    
    2
    
    
    
    (4
    )Increase in net income
    
    $
    26
    
    
    $
    14
  
    
    a $191 million increase in retail revenues due to a rate increase effective July 1,
2007;
    
    a $60 million increase in retail revenues primarily related to customer growth,
excluding weather effects;
    
    a $50 million increase in retail revenues due to the effects of weather;
 75




---



##### Table of Contents




    
    a $3 million increase in revenues from Off-System Sales due to higher prices and
volumes;
    
    a $35 million decrease in retail revenues related to recovery of PSA deferrals,
which had no earnings effect because of amortization of the same amount recorded as
fuel and purchased power expense (see Note 3); and
    
    a $9 million net increase due to miscellaneous factors.
 LIQUIDITY
AND CAPITAL RESOURCES  ARIZONA PUBLIC SERVICE COMPANY
 Cash Flows
  2008
    
    
    2007
    
    
    2006Net cash flow provided by operating activities
    
    $
    785
    
    
    $
    766
    
    
    $
    394Net cash flow used for investing activities
    
    
    (879
    )
    
    
    (881
    )
    
    
    (714
    )Net cash flow provided by financing activities
    
    
    114
    
    
    
    86
    
    
    
    352Net increase (decrease) in cash and cash
equivalents
    
    $
    20
    
    
    $
    (29
    )
    
    $
    32
 2008 Compared with 2007
    2007 Compared with 2006
   76




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##### Table of Contents



Liquidity
  Contractual Obligations
  2010-
    
    
    2012-2009
    
    
    2011
    
    
    2013
    
    
    Thereafter
    
    
    TotalLong-term debt payments,
including interest (a)
    
    $
    182
    
    
    $
    956
    
    
    $
    646
    
    
    $
    3,549
    
    
    $
    5,333Short-term debt payments,
including interest
    
    
    523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    523Purchased power and fuel
commitments (b)
    
    
    449
    
    
    
    651
    
    
    
    777
    
    
    
    6,053
    
    
    
    7,930Operating lease payments
    
    
    76
    
    
    
    135
    
    
    
    122
    
    
    
    121
    
    
    
    454Nuclear decommissioning
funding requirements
    
    
    22
    
    
    
    49
    
    
    
    49
    
    
    
    185
    
    
    
    305Purchase obligations (c)
    
    
    69
    
    
    
    76
    
    
    
    33
    
    
    
    172
    
    
    
    350Minimum pension funding
requirement (d)
    
    
    35
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    59Total 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 on variable-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

and nuclear 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.  77




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ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
  78




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 PageManagements Report on Internal Control Over Financial Reporting
(Pinnacle West Capital Corporation)
    
    
    79Report of Independent Registered Public Accounting Firm
    
    
    80Pinnacle West Consolidated Statements of Income for 2008, 2007 and 2006
    
    
    82Pinnacle West Consolidated Balance Sheets as of December 31, 2008 and 2007
    
    
    83Pinnacle West Consolidated Statements of Cash Flows for 2008, 2007 and 2006
    
    
    85Pinnacle West Consolidated Statements of Changes in Common Stock Equity
for 2008, 2007 and 2006
    
    
    86Notes to Pinnacle Wests Consolidated Financial Statements
    
    
    87Managements Report on Internal Control Over Financial Reporting (Arizona
Public Service Company)
    
    
    142Report of Independent Registered Public Accounting Firm
    
    
    143APS Statements of Income for 2008, 2007 and 2006
    
    
    145APS Balance Sheets as of December 31, 2008 and 2007
    
    
    146APS Statements of Cash Flows for 2008, 2007 and 2006
    
    
    148APS Statements of Changes in Common Stock Equity for 2008, 2007 and 2006
    
    
    149Supplemental Notes to APS Financial Statements
    
    
    151Financial Statement Schedules for 2008, 2007 and 2006Pinnacle West Schedule I  Condensed Statements of Income for 2008, 2007
and 2006
    
    
    159Pinnacle West Schedule I  Condensed Balance Sheets as of December 31, 2008 and
2007
    
    
    160Pinnacle West Schedule I  Condensed Statements of Cash Flows for 2008, 2007
and 2006
    
    
    161Pinnacle West Schedule II  Reserve for Uncollectibles for 2008, 2007 and 2006
    
    
    162APS Schedule II  Reserve for Uncollectibles for 2008, 2007 and 2006
    
    
    163
  79




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(PINNACLE WEST CAPITAL CORPORATION)
 Internal Control  Integrated Framework Internal Control  Integrated Framework,
  80




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control  Integrated
Framework
   81




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##### Table of Contents



Internal Control  Integrated Framework
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans
 
 82




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 Year Ended December 31,2008
    
    
    2007
    
    
    2006OPERATING REVENUESRegulated electricity segment
    
    $
    3,127,383
    
    
    $
    2,918,163
    
    
    $
    2,635,036Real estate segment
    
    
    131,067
    
    
    
    212,586
    
    
    
    399,798Marketing and trading
    
    
    66,897
    
    
    
    138,247
    
    
    
    136,748Other revenues
    
    
    41,729
    
    
    
    48,018
    
    
    
    36,172Total
    
    
    3,367,076
    
    
    
    3,317,014
    
    
    
    3,207,754OPERATING EXPENSESRegulated electricity segment fuel and
purchased power
    
    
    1,284,116
    
    
    
    1,140,923
    
    
    
    960,649Real estate segment operations
    
    
    149,125
    
    
    
    192,972
    
    
    
    324,861Real estate impairment charge (Note 23)
    
    
    53,250
    
    
    
    
    
    
    
    Marketing and trading fuel and
purchased power
    
    
    45,572
    
    
    
    100,462
    
    
    
    105,415Operations and maintenance
    
    
    807,852
    
    
    
    728,340
    
    
    
    684,020Depreciation and amortization
    
    
    390,358
    
    
    
    372,102
    
    
    
    358,605Taxes other than income taxes
    
    
    125,336
    
    
    
    128,210
    
    
    
    128,395Other expenses
    
    
    34,171
    
    
    
    38,925
    
    
    
    28,415Total
    
    
    2,889,780
    
    
    
    2,701,934
    
    
    
    2,590,360OPERATING INCOME
    
    
    477,296
    
    
    
    615,080
    
    
    
    617,394OTHERAllowance for equity funds used during
construction
    
    
    18,636
    
    
    
    21,195
    
    
    
    14,312Other income (Note 19)
    
    
    12,078
    
    
    
    24,694
    
    
    
    44,028Other expense (Note 19)
    
    
    (31,576
    )
    
    
    (25,857
    )
    
    
    (27,777
    )Total
    
    
    (862
    )
    
    
    20,032
    
    
    
    30,563INTEREST EXPENSEInterest charges
    
    
    216,290
    
    
    
    208,521
    
    
    
    196,826Capitalized interest
    
    
    (18,820
    )
    
    
    (23,063
    )
    
    
    (20,989
    )Total
    
    
    197,470
    
    
    
    185,458
    
    
    
    175,837INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    278,964
    
    
    
    449,654
    
    
    
    472,120INCOME TAXES (Note 4)
    
    
    65,407
    
    
    
    150,910
    
    
    
    155,855INCOME FROM CONTINUING OPERATIONS
    
    
    213,557
    
    
    
    298,744
    
    
    
    316,265INCOME FROM DISCONTINUED OPERATIONSNet of income tax expense of $18,489,
$5,582 and $7,133 (Note 22)
    
    
    28,568
    
    
    
    8,399
    
    
    
    10,990NET INCOME
    
    $
    242,125
    
    
    $
    307,143
    
    
    $
    327,255WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING  BASIC
    
    
    100,691
    
    
    
    100,256
    
    
    
    99,417WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING  DILUTED
    
    
    100,965
    
    
    
    100,835
    
    
    
    100,010EARNINGS PER
WEIGHTED  AVERAGE
COMMON SHARE OUTSTANDINGIncome from
continuing operations  basic
    
    $
    2.12
    
    
    $
    2.98
    
    
    $
    3.18Net income
 basic
    
    
    2.40
    
    
    
    3.06
    
    
    
    3.29Income from
continuing operations  diluted
    
    
    2.12
    
    
    
    2.96
    
    
    
    3.16Net income
 diluted
    
    
    2.40
    
    
    
    3.05
    
    
    
    3.27DIVIDENDS DECLARED PER SHARE
    
    $
    2.10
    
    
    $
    2.10
    
    
    $
    2.025
  83




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
 December 31,2008
    
    
    2007ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    105,245
    
    
    $
    56,321Customer and other receivables
    
    
    292,682
    
    
    
    349,134Accrued utility revenues
    
    
    100,089
    
    
    
    106,873Allowance for doubtful accounts
    
    
    (3,383
    )
    
    
    (4,782
    )Materials and supplies (at average cost)
    
    
    173,252
    
    
    
    149,759Fossil fuel (at average cost)
    
    
    29,752
    
    
    
    27,792Deferred income taxes (Note 4)
    
    
    79,729
    
    
    
    31,510Home inventory (Notes 1 and 23)
    
    
    50,688
    
    
    
    98,729Assets from risk management and trading activities
(Note 18)
    
    
    32,581
    
    
    
    57,605Other current assets
    
    
    21,847
    
    
    
    33,988Total current assets
    
    
    882,482
    
    
    
    906,929INVESTMENTS AND OTHER ASSETSReal estate
investments  net (Notes 1, 6 and 23)
    
    
    415,296
    
    
    
    532,600Assets from long-term risk management and trading
activities (Note 18)
    
    
    33,675
    
    
    
    48,928Nuclear decommissioning trust (Note 12)
    
    
    343,052
    
    
    
    379,347Other assets
    
    
    117,935
    
    
    
    117,941Total investments and other assets
    
    
    909,958
    
    
    
    1,078,816PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6,
9 and 10)Plant in service and held for future use
    
    
    12,264,805
    
    
    
    11,640,739Less accumulated depreciation and amortization
    
    
    4,141,546
    
    
    
    4,004,944Net
    
    
    8,123,259
    
    
    
    7,635,795Construction work in progress
    
    
    572,354
    
    
    
    625,577Intangible assets, net of accumulated amortization
of $282,196 and $252,122
    
    
    131,722
    
    
    
    105,746Nuclear fuel, net of accumulated amortization of
$55,343 and $68,375
    
    
    89,323
    
    
    
    69,271Total property, plant and equipment
    
    
    8,916,658
    
    
    
    8,436,389DEFERRED DEBITSDeferred fuel and purchased power regulatory asset
(Notes 1, 3 and 4)
    
    
    7,984
    
    
    
    110,928Other regulatory assets (Notes 1, 3 and 4)
    
    
    787,506
    
    
    
    514,353Other deferred debits
    
    
    115,505
    
    
    
    114,794Total deferred debits
    
    
    910,995
    
    
    
    740,075TOTAL ASSETS
    
    $
    11,620,093
    
    
    $
    11,162,209
  84




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
 December 31,2008
    
    
    2007LIABILITIES AND COMMON STOCK EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    261,029
    
    
    $
    323,346Accrued taxes
    
    
    109,798
    
    
    
    269,628Accrued interest
    
    
    40,741
    
    
    
    39,836Short-term borrowings (Note 5)
    
    
    670,469
    
    
    
    340,661Current maturities of long-term debt (Note 6)
    
    
    177,646
    
    
    
    163,773Customer deposits
    
    
    78,745
    
    
    
    80,010Liabilities from risk management and trading
activities (Note 18)
    
    
    69,585
    
    
    
    24,510Other current liabilities
    
    
    97,915
    
    
    
    102,685Total current liabilities
    
    
    1,505,928
    
    
    
    1,344,449LONG-TERM DEBT LESS CURRENT MATURITIES
(Note 6)
    
    
    3,031,603
    
    
    
    3,127,125DEFERRED CREDITS AND OTHERDeferred income taxes (Note 4)
    
    
    1,403,318
    
    
    
    1,243,743Regulatory liabilities (Notes 1, 3 and 4)
    
    
    587,586
    
    
    
    642,564Liability for asset retirements (Note 12)
    
    
    275,970
    
    
    
    281,903Liabilities for pension and other postretirement
benefits (Note 8)
    
    
    675,788
    
    
    
    504,603Liabilities from risk management and trading
activities (Note 18)
    
    
    126,532
    
    
    
    4,701Other
    
    
    567,389
    
    
    
    481,510Total deferred credits and other
    
    
    3,636,583
    
    
    
    3,159,024COMMITMENTS AND CONTINGENCIES (SEE NOTES)COMMON STOCK EQUITY (Note 7)Common stock, no par value; authorized
150,000,000 shares; issued 100,948,436 at
end of 2008 and 100,525,470 at end of 2007
    
    
    2,151,323
    
    
    
    2,135,787Treasury 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
    
    
    
    2,133,733Accumulated other comprehensive income (loss):Pension and other postretirement benefits (Note 8)
    
    
    (47,547
    )
    
    
    (39,336
    )Derivative instruments
    
    
    (99,151
    )
    
    
    23,473Total accumulated other comprehensive loss
    
    
    (146,698
    )
    
    
    (15,863
    )Retained earnings
    
    
    1,444,208
    
    
    
    1,413,741Total common stock equity
    
    
    3,445,979
    
    
    
    3,531,611TOTAL LIABILITIES AND COMMON STOCK EQUITY
    
    $
    11,620,093
    
    
    $
    11,162,209
  85




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet Income
    
    $
    242,125
    
    
    $
    307,143
    
    
    $
    327,255Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization including nuclear fuel
    
    
    423,969
    
    
    
    403,896
    
    
    
    386,760Deferred fuel and purchased power
    
    
    (80,183
    )
    
    
    (196,136
    )
    
    
    (252,849
    )Deferred fuel and purchased power amortization
    
    
    183,126
    
    
    
    231,106
    
    
    
    265,337Deferred 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
    )
    
    
    27,738Change in mark-to-market valuations
    
    
    9,074
    
    
    
    17,579
    
    
    
    28,464Changes in current assets and liabilities:Customer and other receivables
    
    
    80,834
    
    
    
    62,850
    
    
    
    9,189Materials, 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
    )
    
    
    11,563Other 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
    
    
    
    34,990Change 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
    )
    
    
    17,541Change in other long-term liabilities
    
    
    24,751
    
    
    
    47,162
    
    
    
    30,896Net cash flow provided by operating activities
    
    
    813,568
    
    
    
    657,936
    
    
    
    393,502CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (935,577
    )
    
    
    (960,390
    )
    
    
    (788,982
    )Contributions in aid of construction
    
    
    60,292
    
    
    
    41,809
    
    
    
    51,203Capitalized interest
    
    
    (18,820
    )
    
    
    (23,063
    )
    
    
    (20,990
    )Proceeds from the sale of Silverhawk
    
    
    
    
    
    
    
    
    
    
    207,620Proceeds from sale of investment securities
    
    
    
    
    
    
    69,225
    
    
    
    1,406,704Purchases of investment securities
    
    
    
    
    
    
    (36,525
    )
    
    
    (1,439,404
    )Proceeds from nuclear decommissioning trust sales
    
    
    317,619
    
    
    
    259,026
    
    
    
    254,651Investment in nuclear decommissioning trust
    
    
    (338,361
    )
    
    
    (279,768
    )
    
    
    (275,393
    )Proceeds from sale of commercial real estate investments
    
    
    94,171
    
    
    
    58,139
    
    
    
    39,621Other
    
    
    5,517
    
    
    
    (1,807
    )
    
    
    (3,763
    )Net cash flow used for investing activities
    
    
    (815,159
    )
    
    
    (873,354
    )
    
    
    (568,733
    )CASH FLOWS FROM FINANCING ACTIVITIESIssuance of long-term debt
    
    
    96,934
    
    
    
    230,571
    
    
    
    757,636Repayment and reacquisition of long-term debt
    
    
    (181,491
    )
    
    
    (162,060
    )
    
    
    (527,864
    )Short-term
borrowings  net
    
    
    331,741
    
    
    
    304,911
    
    
    
    9,911Dividends paid on common stock
    
    
    (204,247
    )
    
    
    (210,473
    )
    
    
    (201,220
    )Common stock equity issuance
    
    
    3,687
    
    
    
    24,089
    
    
    
    39,548Other
    
    
    3,891
    
    
    
    (2,509
    )
    
    
    30,427Net cash flow provided by financing activities
    
    
    50,515
    
    
    
    184,529
    
    
    
    108,438NET 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
    
    
    
    154,003CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    105,245
    
    
    $
    56,321
    
    
    $
    87,210Supplemental disclosure of cash flow informationCash paid during the period for:Income taxes, net of refunds
    
    $
    24,233
    
    
    $
    204,643
    
    
    $
    157,245Interest, net of amounts capitalized
    
    $
    191,085
    
    
    $
    193,533
    
    
    $
    153,503
  86




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
 Year Ended December 31,2008
    
    
    2007
    
    
    2006COMMON STOCK (Note 7)Balance at beginning of year
    
    $
    2,135,787
    
    
    $
    2,114,550
    
    
    $
    2,067,377Issuance of common stock
    
    
    10,845
    
    
    
    24,089
    
    
    
    39,420Other
    
    
    4,691
    
    
    
    (2,852
    )
    
    
    7,753Balance at end of year
    
    
    2,151,323
    
    
    
    2,135,787
    
    
    
    2,114,550TREASURY 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
    
    
    
    1,025Balance at end of year
    
    
    (2,854
    )
    
    
    (2,054
    )
    
    
    (449
    )RETAINED EARNINGSBalance at beginning of year
    
    
    1,413,741
    
    
    
    1,319,747
    
    
    
    1,193,712Net income
    
    
    242,125
    
    
    
    307,143
    
    
    
    327,255Common 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
    
    
    
    1,319,747ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)Balance at beginning of year
    
    
    (15,863
    )
    
    
    12,268
    
    
    
    165,120Pension 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
    
    
    
    
    
    
    
    
    
    
    44,086Adjustment to reflect a change in accounting (SFAS
No. 158), net of tax expense of $22,412
    
    
    
    
    
    
    
    
    
    
    33,928Derivative 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
    )
    
    
    12,268TOTAL COMMON STOCK EQUITY
    
    $
    3,445,979
    
    
    $
    3,531,611
    
    
    $
    3,446,116COMPREHENSIVE INCOMENet income
    
    $
    242,125
    
    
    $
    307,143
    
    
    $
    327,255Other comprehensive loss
    
    
    (130,835
    )
    
    
    (28,131
    )
    
    
    (186,780
    )Comprehensive income
    
    $
    111,290
    
    
    $
    279,012
    
    
    $
    140,475
  87




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Consolidation and Nature of Operations
   Accounting Records and Use of Estimates
  Derivative Accounting
   88




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        89




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Regulatory Accounting
      90




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31,2008
    
    
    2007Pension and other postretirement benefits
    
    $
    473
    
    
    $
    338Deferred
fuel and purchased power  mark-to-market
    
    
    118
    
    
    
    7Regulatory asset for deferred income taxes
    
    
    51
    
    
    
    40Deferred compensation
    
    
    30
    
    
    
    30Transmission vegetation management
    
    
    20
    
    
    
    6Demand side management
    
    
    17
    
    
    
    3Coal reclamation
    
    
    17
    
    
    
    18Competition rules compliance charge (a)
    
    
    16
    
    
    
    25Loss on reacquired debt
    
    
    16
    
    
    
    16Deferred fuel and purchased power (a) (Note 3)
    
    
    8
    
    
    
    111Other
    
    
    29
    
    
    
    31Total 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 exclusion from rate base.  December 31,2008
    
    
    2007Removal costs (a)
    
    $
    388
    
    
    $
    392Regulatory liability related to asset retirement
obligations
    
    
    103
    
    
    
    153Tax benefit of Medicare subsidy
    
    
    16
    
    
    
    35Deferred gains on utility property
    
    
    20
    
    
    
    20Spent nuclear fuel
    
    
    22
    
    
    
    11Renewable energy standard
    
    
    22
    
    
    
    10Deferred interest income (b)
    
    
    8
    
    
    
    13Other
    
    
    9
    
    
    
    9Total 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 legal obligation for removal.(b)
    
    Subject to a carrying charge. Utility Plant and Depreciation
  
    
    material and labor;
    
    contractor costs;
    
    capitalized leases;
 91




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    
    construction overhead costs (where applicable); and
    
    capitalized interest or an allowance for funds used during construction.
    
    
    Fossil plant  16 years;
    
    Nuclear plant  18 years;
    
    Other generation  31 years;
    
    Transmission  42 years;
    
    Distribution  33 years; and
    
    Other  7 years.
  Investments
   Capitalized Interest
  92




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Allowance for Funds Used During Construction
   Electric Revenues
    Real Estate Revenues
  93




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Real Estate Investments
     Cash and Cash Equivalents
  Nuclear Fuel
   94




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Income Taxes
  Intangible Assets
  2. New Accounting Standards
  
    
    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 Is Not Active
     95




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   3. Regulatory Matters
 2008 General Rate Case
 APS Request
  
    
    an increase of $264.3 million in non-fuel base rates and a net increase of $13.9
million for fuel and purchased power costs 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, net of accumulated depreciation and other credits, as
of December 31, 2007, which includes certain adjustments, such as the inclusion of
Units 5 and 6 of the Yucca Power Plant (near Yuma in southwestern Arizona), the steam
generator replacement at Palo Verde Unit 3, environmental upgrades to APS coal plants,
and other plant additions under construction at the end of the test year that are
currently in service or expected to go into service before the proposed rates are
requested to become effective;
    
    the following proposed capital structure and costs of capital:
 Capital Structure
    
    Cost of CapitalLong-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 allow eligible customers additional options to manage
their electric bills, as well as other conservation-related rate design proposals.
 96




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Interim Rate Surcharge
  ACC Staff Rate Case Recommendation
  
    
    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 proposed capital structure;
    
    A reduction to APS proposed rate base of $57 million, the majority of which ($45
million) results from the exclusion of 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 beyond current ACC mandated requirements; and
 97




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    
    That APS should propose in its rebuttal testimony a means to provide customers with
greater rate stability, such as the use of a three-year interval between base rate
filings.
  
    
    The $79.3 million attrition adjustment; and
    
    Modifications to APS line extension policy that would have resulted in the
establishment of the growth-related impact fee referenced above.
 Other Intervenors Recommendations
 
    
    RUCO recommends no net rate change after reclassification of $170.0 million of PSA
revenues to base rates, based on a rate base of $4.9 billion, a base fuel rate of
$0.0388 per kWh, APS proposed capital structure, and a return on common equity of
9.6%.
    
    AECC recommends that APS request be reduced by $101.4 million (of which $42.5
million was a reduction in fuel and purchased power expense).
 Settlement Discussions and Procedural Schedule
 2007 Retail Rate Order
  98




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 PSA Mechanism
  
    
    APS records deferrals for recovery or refund to the extent actual retail fuel and
purchased power costs vary from the Base 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 purchase power agreements acquired
through competitive procurement) and the Base Fuel Rate; APS absorbs 10% of the retail
fuel and purchased power costs above the Base Fuel Rate and retains 10% of the benefit
from the retail fuel and purchased 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 be reconciled to actual costs experienced for each PSA Year
(February 1 through January 31) (see the following bullet point); and
    
    the PSA rate includes (a) a Forward Component, under which APS recovers or refunds
differences between expected 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 those recovered
through the combination of the Base Fuel Rate and the Forward Component are recovered
during the next PSA Year; and (c) a Transition Component, under which APS may seek
mid-year PSA changes due to large variances between actual fuel and purchased power
costs and the combination of the Base Fuel Rate and the Forward Component.
 PSA Balance
  99




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Year EndedDecember 31,2008
    
    
    2007Beginning balance
    
    $
    111
    
    
    $
    160Deferred fuel and purchased power costs-current period
    
    
    78
    
    
    
    189Regulatory disallowance
    
    
    
    
    
    
    (14
    )Interest on deferred fuel and purchased power
    
    
    2
    
    
    
    7Amounts recovered through revenues
    
    
    (183
    )
    
    
    (231
    )Ending balance
    
    $
    8
    
    
    $
    111
  Formula Transmission Tariff
   Equity Infusion Approval
   100




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Federal
 FERC Order
    4. Income Taxes
    101




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   2008
    
    
    2007Total unrecognized tax benefits, January 1
    
    $
    157,869
    
    
    $
    132,691Additions for tax positions of the current year
    
    
    12,923
    
    
    
    Additions for tax positions of prior years
    
    
    32,510
    
    
    
    65,022Reductions 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
      102




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Current:Federal
    
    $
    (85,866
    )
    
    $
    183,547
    
    
    $
    110,029State
    
    
    11,738
    
    
    
    30,972
    
    
    
    21,507Total current
    
    
    (74,128
    )
    
    
    214,519
    
    
    
    131,536Deferred:Income from continuing operations
    
    
    158,024
    
    
    
    (56,147
    )
    
    
    31,452Discontinued operations
    
    
    
    
    
    
    (1,880
    )
    
    
    Total deferred
    
    
    158,024
    
    
    
    (58,027
    )
    
    
    31,452Total income tax expense
    
    
    83,896
    
    
    
    156,492
    
    
    
    162,988Less: income tax expense (benefit) on
discontinued operations
    
    
    18,489
    
    
    
    5,582
    
    
    
    7,133Income tax
expense  continuing
operations
    
    $
    65,407
    
    
    $
    150,910
    
    
    $
    155,855
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Federal income tax expense at 35%
statutory rate
    
    $
    97,637
    
    
    $
    157,379
    
    
    $
    165,242Increases (reductions) in tax expense
resulting from:State income tax net of federal income
tax benefit
    
    
    9,601
    
    
    
    16,801
    
    
    
    17,250Credits 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
  December 31,2008
    
    
    2007Current asset
    
    $
    79,729
    
    
    $
    31,510Long-term liability
    
    
    (1,403,318
    )
    
    
    (1,243,743
    )Accumulated
deferred income taxes  net
    
    $
    (1,323,589
    )
    
    $
    (1,212,233
    )
 103




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,2008
    
    
    2007DEFERRED TAX ASSETSRisk management and trading activities
    
    $
    132,383
    
    
    $
    13,958Regulatory liabilities:Asset retirement obligation
    
    
    194,326
    
    
    
    214,607Federal excess deferred income taxes
    
    
    9,428
    
    
    
    11,091Tax benefit of Medicare subsidy
    
    
    4,197
    
    
    
    11,727Other
    
    
    9,789
    
    
    
    26,579Pension and other postretirement liabilities
    
    
    281,053
    
    
    
    211,192Deferred gain on Palo Verde Unit 2 sale
leaseback
    
    
    12,665
    
    
    
    14,408Other
    
    
    92,251
    
    
    
    112,209Total deferred tax assets
    
    
    736,092
    
    
    
    615,771DEFERRED TAX LIABILITIESPlant-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
    )Accumulated
deferred income taxes  net
    
    $
    (1,323,589
    )
    
    $
    (1,212,233
    )
 5. Lines of Credit and Short-Term Borrowings
  104




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    6. Long-Term Debt and Liquidity Matters
  105




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31,Maturity
    
    
    InterestDates (a)
    
    
    Rates
    
    
    2008
    
    
    2007APSPollution control bonds
    
    
    2024-2034
    
    
    
    (b
    )
    
    $
    539,145
    
    
    $
    565,855Pollution control bonds with senior
notes
    
    
    2029
    
    
    
    5.05
    %
    
    
    90,000
    
    
    
    90,000Unsecured notes
    
    
    2011
    
    
    
    6.375
    %
    
    
    400,000
    
    
    
    400,000Unsecured notes
    
    
    2012
    
    
    
    6.50
    %
    
    
    375,000
    
    
    
    375,000Unsecured notes
    
    
    2033
    
    
    
    5.625
    %
    
    
    200,000
    
    
    
    200,000Unsecured notes
    
    
    2015
    
    
    
    4.650
    %
    
    
    300,000
    
    
    
    300,000Unsecured notes
    
    
    2014
    
    
    
    5.80
    %
    
    
    300,000
    
    
    
    300,000Unsecured notes
    
    
    2035
    
    
    
    5.50
    %
    
    
    250,000
    
    
    
    250,000Unsecured notes
    
    
    2016
    
    
    
    6.25
    %
    
    
    250,000
    
    
    
    250,000Unsecured notes
    
    
    2036
    
    
    
    6.875
    %
    
    
    150,000
    
    
    
    150,000Secured note
    
    
    2014
    
    
    
    6.00
    %
    
    
    1,258
    
    
    
    1,430Unamortized discount and premium
    
    
    
    
    
    
    
    
    
    
    (7,908
    )
    
    
    (8,883
    )Capitalized lease obligations
    
    
    2009-2012
    
    
    
    (c
    )
    
    
    3,621
    
    
    
    4,457Subtotal (d)
    
    
    
    
    
    
    
    
    
    
    2,851,116
    
    
    
    2,877,859SUNCORNotes payable
    
    
    2009-2013
    
    
    
    (e
    )
    
    
    182,804
    
    
    
    237,671Capitalized lease obligations
    
    
    2009-2012
    
    
    
    (f
    )
    
    
    329
    
    
    
    368Subtotal
    
    
    
    
    
    
    
    
    
    
    183,133
    
    
    
    238,039PINNACLE WESTSenior notes
    
    
    2011
    
    
    
    5.91
    %
    
    
    175,000
    
    
    
    175,000Total long-term debt
    
    
    
    
    
    
    
    
    
    
    3,209,249
    
    
    
    3,290,898Less current maturities
    
    
    
    
    
    
    
    
    
    
    177,646
    
    
    
    163,773TOTAL LONG-TERM DEBT
LESS CURRENT
MATURITIES
    
    
    
    
    
    
    
    
    
    $
    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-term interest rates would affect the costs associated with this debt. In
addition, these amounts include $343 million of auction rate debt securities backed by
insurance at December 31, 2008 and 2007. 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 its
1999 Series A Coconino County Pollution Control Bonds. APS borrowed funds under its
revolving lines of credit to re-purchase the bonds, as permitted under the bond indenture.
APS intends to keep the $27 million outstanding until we complete our planned refunding and
reissuance 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 at December 31, 2007. APS current maturities of long-term debt were $1
million at December 31, 2008 and 2007. 106




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (e)
    
    SunCor had $125 million outstanding at December 31, 2008 under its revolving lines of credit.
The weighted-average interest rate was 4.11% at December 31, 2008. The remaining amount of
approximately $58 million at December 31, 2008 was made up of multiple notes with variable
interest rates based on the lenders prime rates plus 1.75% and 2.0% or LIBOR plus 1.7%, 2.0%,
2.25% and 2.5%. SunCor had $94 million outstanding at December 31, 2007 under its revolving
lines of credit. The weighted-average interest rate was 7.27% at December 31, 2007. The
remaining amount of approximately $143 million at December 31, 2007 was made up of multiple
notes with variable interest rates based on the lenders prime rates plus 1.75% and 2.0% or
LIBOR plus 1.7%, 2.0% and 2.25%. There is also a note at a fixed rate of 4.25% at December
31, 2008 and 2007.(f)
    
    The weighted-average interest rate was 6.2% at December 31, 2008 and 7.0% at December 31,
2007.    107




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       108




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Pinnacle West-Year
    
    Consolidated
    
    
    APS2009
    
    $
    178
    
    
    $
    12010
    
    
    199
    
    
    
    1972011
    
    
    578
    
    
    
    4012012
    
    
    376
    
    
    
    3762013
    
    
    2
    
    
    
    Thereafter
    
    
    1,884
    
    
    
    1,884Total
    
    $
    3,217
    
    
    $
    2,859
 7. Common Stock and Treasury Stock
  Common Stock
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance 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
    
    
    
    1,025Other
    
    
    
    
    
    
    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
    
    
    
    359Other
    
    
    
    
    
    
    (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
    
    
    
    587Other
    
    
    
    
    
    
    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. 109




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8. Retirement Plans and Other Benefits
      110




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Pension
    
    
    Other Benefits2008
    
    
    2007
    
    
    2006
    
    
    2008
    
    
    2007
    
    
    2006Service cost-benefits
earned during the
period
    
    $
    54,576
    
    
    $
    51,803
    
    
    $
    47,287
    
    
    $
    17,793
    
    
    $
    18,491
    
    
    $
    19,968Interest cost on benefit
obligation
    
    
    110,207
    
    
    
    100,736
    
    
    
    92,196
    
    
    
    37,897
    
    
    
    35,284
    
    
    
    34,653Expected 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
    
    
    
    3,005Prior 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
    
    
    
    8,662Net periodic benefit
cost
    
    $
    60,074
    
    
    $
    64,662
    
    
    $
    68,693
    
    
    $
    17,333
    
    
    $
    18,407
    
    
    $
    29,233Portion of cost charged
to expense
    
    $
    28,854
    
    
    $
    28,063
    
    
    $
    30,912
    
    
    $
    8,325
    
    
    $
    7,989
    
    
    $
    13,155APS share of cost charged
to expense
    
    $
    27,491
    
    
    $
    26,548
    
    
    $
    29,203
    
    
    $
    7,932
    
    
    $
    7,557
    
    
    $
    12,428
  Pension
    
    
    Other Benefits2008
    
    
    2007
    
    
    2008
    
    
    2007Change in Benefit ObligationBenefit obligation at January 1
    
    $
    1,720,844
    
    
    $
    1,670,274
    
    
    $
    605,125
    
    
    $
    616,985Service cost
    
    
    54,576
    
    
    
    51,803
    
    
    
    17,793
    
    
    
    18,491Interest cost
    
    
    110,207
    
    
    
    100,736
    
    
    
    37,897
    
    
    
    35,284Benefit 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
    
    
    
    605,125Change in Plan AssetsFair value of plan assets at
January 1
    
    
    1,318,939
    
    
    
    1,214,229
    
    
    
    499,764
    
    
    
    480,638Actual return on plan assets
    
    
    132,449
    
    
    
    101,138
    
    
    
    (64,364
    )
    
    
    26,952Employer contributions
    
    
    35,000
    
    
    
    52,000
    
    
    
    10,972
    
    
    
    18,407Benefit 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
    
    
    
    499,764Funded Status at December 31
    
    $
    (454,284
    )
    
    $
    (401,905
    )
    
    $
    (225,959
    )
    
    $
    (105,361
    )
 111




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2008
    
    2007Projected benefit obligation
    
    $
    1,884,656
    
    
    $
    1,720,844Accumulated benefit obligation
    
    
    1,631,909
    
    
    
    1,484,444Fair value of plan assets
    
    
    1,430,372
    
    
    
    1,318,939
  Pension
    
    
    Other Benefits2008
    
    
    2007
    
    
    2008
    
    
    2007Current asset
    
    $
    
    
    
    $
    
    
    
    $
    1,221
    
    
    $
    1,321Current 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
    )
  Pension
    
    
    Other Benefits2008
    
    
    2007
    
    
    2008
    
    
    2007Net actuarial loss
    
    $
    304,335
    
    
    $
    268,532
    
    
    $
    224,624
    
    
    $
    106,407Prior service cost (credit)
    
    
    9,946
    
    
    
    12,401
    
    
    
    (920
    )
    
    
    (1,045
    )Transition obligation
    
    
    
    
    
    
    
    
    
    
    12,019
    
    
    
    15,024APS 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
  OtherPension
    
    
    BenefitsNet actuarial loss
    
    $
    11,064
    
    
    $
    11,094Prior service cost (credit)
    
    
    2,080
    
    
    
    (125
    )Transition obligation
    
    
    
    
    
    
    3,004Total amounts estimated to be
amortized from accumulated
other comprehensive income and
regulatory assets in 2009
    
    $
    13,144
    
    
    $
    13,973
 112




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Benefit CostsBenefit Obligations
    
    For the Years EndedAs of December 31,
    
    December 31,2008
    
    2007
    
    2008
    
    2007
    
    2006Discount 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
   1% Increase
    
    1% DecreaseEffect on other postretirement
benefits expense, after
consideration of amounts
capitalized or billed to
electric plant participants
    
    $
    9
    
    
    $
    (7
    )Effect on service and interest
cost components of net periodic
other postretirement benefit
costs
    
    
    11
    
    
    
    (8
    )Effect on the accumulated other
postretirement benefit
obligation
    
    
    103
    
    
    
    (83
    )
 Plan Assets
  113




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Pension
    
    Other BenefitsAsset Category:
    
    2008
    
    2007
    

Target
Range
    
    2008
    
    2007
    

Target
RangeEquity 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
    %
   Contributions
  Estimated Future Benefit Payments
  Year
    
    Pension
    
    Other Benefits (a)2009
    
    $
    68,795
    
    
    $
    19,7092010
    
    
    75,553
    
    
    
    22,0392011
    
    
    84,022
    
    
    
    24,5492012
    
    
    94,205
    
    
    
    27,1352013
    
    
    105,717
    
    
    
    30,132Years 2014-2018
    
    
    702,148
    
    
    
    196,470
 
 (a)
    
    The expected future other benefit payments take into account the Medicare Part
D subsidy. 114




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Employee Savings Plan Benefits
  9. Leases
      115




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Pinnacle WestYear
    
    Consolidated
    
    
    APS2009
    
    $
    82
    
    
    $
    762010
    
    
    76
    
    
    
    702011
    
    
    71
    
    
    
    652012
    
    
    67
    
    
    
    622013
    
    
    65
    
    
    
    60Thereafter
    
    
    135
    
    
    
    121Total future lease
commitments
    
    $
    496
    
    
    $
    454
 10. Jointly-Owned Facilities
  ConstructionPercent
    
    Plant in
    
    Accumulated
    
    Work inOwned
    
    Service
    
    Depreciation
    
    ProgressGenerating facilities:Palo Verde Units 1 and 3
    
    
    29.1
    %
    
    $
    1,989,210
    
    
    $
    1,032,195
    
    
    $
    51,621Palo Verde Unit 2 (see Note 9)
    
    
    17.0
    %
    
    
    670,204
    
    
    
    309,143
    
    
    
    26,693Four Corners Units 4 and 5
    
    
    15.0
    %
    
    
    167,152
    
    
    
    102,218
    
    
    
    2,633Navajo Generating Station
Units 1, 2 and 3
    
    
    14.0
    %
    
    
    256,304
    
    
    
    149,201
    
    
    
    5,102Cholla common facilities (a)
    
    
    63.9
    %(b)
    
    
    130,454
    
    
    
    42,483
    
    
    
    3,548Transmission facilities:ANPP 500KV System
    
    
    35.8
    %(b)
    
    
    82,470
    
    
    
    25,246
    
    
    
    3,620Navajo Southern System
    
    
    31.4
    %(b)
    
    
    41,690
    
    
    
    12,998
    
    
    
    559Palo Verde  Yuma 500KV
System
    
    
    23.9
    %(b)
    
    
    9,408
    
    
    
    3,994
    
    
    
    368Four 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. 116




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 11. Commitments and Contingencies
 Palo Verde Nuclear Generating Station
 Spent Nuclear Fuel and Waste Disposal
   Nuclear Insurance
   117




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Fuel and Purchased Power Commitments
    Actual
    
    

    Estimated (a)2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013
    
    ThereafterCoal take-or-pay
commitments
    
    $
    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 is approximately $595 million. Coal Mine Reclamation Obligations
  California Energy Market Issues and Refunds in the Pacific Northwest
 FERC
  118




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Navajo Nation Litigation
   119




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Superfund
 nd
 Salt River Project
  Litigation
  12. Asset Retirement Obligations
   120




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   2008
    
    
    2007Asset retirement obligations at the
beginning of year
    
    $
    282
    
    
    $
    268Changes attributable to:Liabilities settled
    
    
    (2
    )
    
    
    (2
    )Accretion expense
    
    
    19
    
    
    
    20Estimated cash flow revisions
    
    
    (23
    )
    
    
    (4
    )Asset retirement obligations at the
end of year
    
    $
    276
    
    
    $
    282
  .
 Total
    
    
    TotalUnrealized
    
    
    UnrealizedFair Value
    
    
    Gains
    
    
    Losses2008Equity securities
    
    $
    113
    
    
    $
    18
    
    
    $
    (18
    )Fixed income securities
    
    
    228
    
    
    
    10
    
    
    
    (5
    )Net payables (a)
    
    
    2
    
    
    
    
    
    
    
    Total
    
    $
    343
    
    
    $
    28
    
    
    $
    (23
    )2007Equity securities
    
    $
    175
    
    
    $
    68
    
    
    $
    Fixed income securities
    
    
    204
    
    
    
    5
    
    
    
    (1
    )Total
    
    $
    379
    
    
    $
    73
    
    
    $
    (1
    )
 
 (a)
    
    Net payables relate to pending securities sales and purchases. 121




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year Ended December 31,2008
    
    2007
    
    2006Realized gains
    
    $
    7
    
    
    $
    3
    
    
    $
    9Realized losses
    
    
    (8
    )
    
    
    (4
    )
    
    
    Proceeds from the sale of securities
    
    
    318
    
    
    
    259
    
    
    
    255
  Fair ValueLess than one year
    
    $
    111 year - 5 years
    
    
    415 years - 10 years
    
    
    47Greater than 10 years
    
    
    129Total
    
    $
    228
  13. Selected Quarterly Financial Data (Unaudited)
  122




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2008 Quarter Ended
    
    2008March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalAs originally reported:Operating revenues
    
    $
    736,738
    
    
    $
    926,193
    
    
    $
    1,079,975Operations and
maintenance
    
    
    194,124
    
    
    
    194,909
    
    
    
    212,327Operating income
    
    
    38,798
    
    
    
    178,875
    
    
    
    273,913Income taxes
    
    
    (557
    )
    
    
    17,076
    
    
    
    75,970Income from continuing
operations
    
    
    (4,668
    )
    
    
    114,433
    
    
    
    150,503Net income
    
    
    (4,473
    )
    
    
    133,862
    
    
    
    151,586APSES 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
    )
    
    
    1,978Income taxes
    
    
    650
    
    
    
    (148
    )
    
    
    789Income from continuing
operations
    
    
    1,005
    
    
    
    (229
    )
    
    
    1,219Net income
    
    
    
    
    
    
    
    
    
    
    After APSES
reclassifications:Operating revenues
    
    $
    709,732
    
    
    $
    898,028
    
    
    $
    1,072,901
    
    
    $
    686,415
    
    
    $
    3,367,076Operations
and maintenance
    
    
    193,023
    
    
    
    193,700
    
    
    
    211,332
    
    
    
    209,797
    
    
    
    807,852Operating income
    
    
    40,441
    
    
    
    178,490
    
    
    
    275,891
    
    
    
    (17,526
    )
    
    
    477,296Income taxes
    
    
    93
    
    
    
    16,928
    
    
    
    76,759
    
    
    
    (28,373
    )
    
    
    65,407Income from continuing
operations
    
    
    (3,663
    )
    
    
    114,204
    
    
    
    151,722
    
    
    
    (48,706
    )
    
    
    213,557Net income
    
    
    (4,473
    )
    
    
    133,862
    
    
    
    151,586
    
    
    
    (38,850
    )
    
    
    242,125
 123




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2007 Quarter Ended
    
    2007March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalAs originally reported:Operating revenues
    
    $
    695,017
    
    
    $
    862,902
    
    
    $
    1,205,234
    
    
    $
    757,985
    
    
    $
    3,521,138Operations and
maintenance
    
    
    171,578
    
    
    
    177,310
    
    
    
    178,419
    
    
    
    207,398
    
    
    
    734,705Operating income
    
    
    68,221
    
    
    
    158,769
    
    
    
    338,722
    
    
    
    53,319
    
    
    
    619,031Income taxes
    
    
    9,041
    
    
    
    40,713
    
    
    
    92,055
    
    
    
    10,638
    
    
    
    152,447Income from continuing
operations
    
    
    16,464
    
    
    
    79,237
    
    
    
    201,718
    
    
    
    3,713
    
    
    
    301,132Net income
    
    
    16,530
    
    
    
    78,994
    
    
    
    208,708
    
    
    
    2,911
    
    
    
    307,143APSES 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
    
    
    $
    3,317,014Operations
and maintenance
    
    
    170,069
    
    
    
    175,844
    
    
    
    176,848
    
    
    
    205,579
    
    
    
    728,340Operating income
    
    
    64,957
    
    
    
    159,044
    
    
    
    336,534
    
    
    
    54,545
    
    
    
    615,080Income taxes
    
    
    7,764
    
    
    
    40,819
    
    
    
    91,203
    
    
    
    11,124
    
    
    
    150,910Income from continuing
operations
    
    
    14,480
    
    
    
    79,402
    
    
    
    200,394
    
    
    
    4,468
    
    
    
    298,744Net income
    
    
    16,530
    
    
    
    78,994
    
    
    
    208,708
    
    
    
    2,911
    
    
    
    307,143
  2008 Quarter EndedMarch 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
    
    
    
    1.50After 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
    
    
    
    1.50After 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
    )
 124




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2007 Quarter EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,As
originally reported  Basic earnings per share:Income from continuing operations
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    2.01
    
    
    $
    0.04Net income
    
    
    0.17
    
    
    
    0.79
    
    
    
    2.08
    
    
    
    0.03After
APSES reclassifications  Basic earnings per
share:Income from continuing operations
    
    $
    0.14
    
    
    $
    0.79
    
    
    $
    2.00
    
    
    $
    0.04Net income
    
    
    0.17
    
    
    
    0.79
    
    
    
    2.08
    
    
    
    0.03As
originally reported  Diluted earnings per
share:Income from continuing operations
    
    $
    0.16
    
    
    $
    0.79
    
    
    $
    2.00
    
    
    $
    0.04Net income
    
    
    0.16
    
    
    
    0.78
    
    
    
    2.07
    
    
    
    0.03After
APSES reclassifications  Diluted earnings
per share:Income from continuing operations
    
    $
    0.14
    
    
    $
    0.79
    
    
    $
    1.99
    
    
    $
    0.04Net income
    
    
    0.16
    
    
    
    0.78
    
    
    
    2.07
    
    
    
    0.03
 14. Fair Value Measurements
      125




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
        126




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    Unobservable
    
    
    Counterparty
    
    
    Balance atAssets
    
    
    Inputs
    
    
    Inputs
    
    
    Netting &
    
    
    December 31,Pinnacle West:
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Other (a)
    
    
    2008AssetsCash Equivalents
    
    $
    75
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    75Risk management
and trading
activities
    
    
    31
    
    
    
    76
    
    
    
    51
    
    
    
    (92
    )
    
    
    66Nuclear
decommissioning
trust
    
    
    33
    
    
    
    308
    
    
    
    
    
    
    
    2
    
    
    
    343Total
    
    $
    139
    
    
    $
    384
    
    
    $
    51
    
    
    $
    (90
    )
    
    $
    484LiabilitiesRisk 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 and S-3.  Twelve Months EndedDecember 31, 2008Net derivative asset balance at beginning of period
    
    $
    8Total net gains (losses) realized/unrealized:Included in earnings
    
    
    6Included in OCI
    
    
    (8
    )Deferred as a regulatory asset or liability
    
    
    (39
    )Purchases, issuances, and settlements
    
    
    10Level 3 transfers (a)
    
    
    16Net 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.  127




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  15. Earnings Per Share
  2008
    
    
    2007
    
    
    2006Basic earnings per share:Income from continuing operations
    
    $
    2.12
    
    
    $
    2.98
    
    
    $
    3.18Income (loss) from discontinued
operations
    
    
    0.28
    
    
    
    0.08
    
    
    
    0.11Earnings per
share  basic
    
    $
    2.40
    
    
    $
    3.06
    
    
    $
    3.29Diluted earnings per share:Income from continuing operations
    
    $
    2.12
    
    
    $
    2.96
    
    
    $
    3.16Income (loss) from discontinued
operations
    
    
    0.28
    
    
    
    0.09
    
    
    
    0.11Earnings per
share  diluted
    
    $
    2.40
    
    
    $
    3.05
    
    
    $
    3.27
   16. Stock-Based Compensation
   128




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      129




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   th
    130




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Weighted-Average
    
    AggregateWeighted-
    
    Remaining
    
    Intrinsic ValueShares
    
    Average Exercise
    
    Contractual Term
    
    (dollars inOptions
    
    (in thousands)
    
    Price
    
    (Years)
    
    thousands)Outstanding at
January 1, 2008
    
    
    861
    
    
    $
    40.84Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    165
    
    
    
    45.18Outstanding at
December 31, 2008
    
    
    696
    
    
    
    39.81
    
    
    
    2.6
    
    
    $
    Exercisable at
December 31, 2008
    
    
    696
    
    
    
    39.81
    
    
    
    2.6
    
    
    $
    
   Shares
    
    Weighted-Average Grant-DateNonvested shares
    
    (in thousands)
    
    Fair ValueNonvested at January 1, 2008
    
    
    379
    
    
    $
    43.64Granted
    
    
    287
    
    
    
    36.07Vested
    
    
    159
    
    
    
    41.64Forfeited
    
    
    216
    
    
    
    43.62Nonvested at December 31, 2008
    
    
    291
    
    
    
    39.98
   131




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2008
    
    2008 Grant
    
    2007
    
    2007 Grant
    
    
    
    
    
    2006 GrantShares/
    
    Date Fair
    
    Shares/
    
    Date Fair
    
    2006
    
    Date FairUnits
    
    Value (a)
    
    Units
    
    Value (a)
    
    Shares
    
    Value (a)Restricted stock
award units
    
    
    42,552
    
    
    $
    37.00
    
    
    
    27,026
    
    
    $
    46.58
    
    
    
    
    
    
    $
    Restricted cash
award units
    
    
    149,856
    
    
    
    37.00
    
    
    
    107,891
    
    
    
    46.58
    
    
    
    
    
    
    
    Performance share
awards
    
    
    193,192
    
    
    
    37.00
    
    
    
    134,917
    
    
    
    48.42
    
    
    
    274,070
    
    
    
    41.50Stock ownership
incentive awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,526
    
    
    
    41.50Retention unit
awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,197
    
    
    
    49.92Special 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 closing market price on the grant date.   17. Business Segments
  
    
    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.
  132




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Business Segments for the Year Ended December 31, 2008RegulatedElectricitySegment
    
    
    Real Estate Segment
    
    
    All other (a)
    
    
    TotalOperating revenues
    
    $
    3,127
    
    
    $
    131
    
    
    $
    109
    
    
    $
    3,367Purchased power and fuel costs
    
    
    1,284
    
    
    
    
    
    
    
    46
    
    
    
    1,330Other operating expenses
    
    
    927
    
    
    
    203
    
    
    
    40
    
    
    
    1,170Operating margin
    
    
    916
    
    
    
    (72
    )
    
    
    23
    
    
    
    867Depreciation and amortization
    
    
    383
    
    
    
    5
    
    
    
    2
    
    
    
    390Interest expense
    
    
    189
    
    
    
    6
    
    
    
    2
    
    
    
    197Other expense (income)
    
    
    (4
    )
    
    
    (3
    )
    
    
    8
    
    
    
    1Income from
continuing operations before income taxes
    
    
    348
    
    
    
    (80
    )
    
    
    11
    
    
    
    279Income taxes
    
    
    92
    
    
    
    (31
    )
    
    
    4
    
    
    
    65Income from continuing operations
    
    
    256
    
    
    
    (49
    )
    
    
    7
    
    
    
    214Income from discontinued
operations  net of income
tax expense of $18 million
(see Note 22)
    
    
    
    
    
    
    23
    
    
    
    5
    
    
    
    28Net income
    
    $
    256
    
    
    $
    (26
    )
    
    $
    12
    
    
    $
    242Total assets
    
    $
    10,951
    
    
    $
    523
    
    
    $
    146
    
    
    $
    11,620Capital expenditures
    
    $
    856
    
    
    $
    41
    
    
    $
    7
    
    
    $
    904
 Business Segments for the Year Ended December 31, 2007RegulatedElectricitySegment
    
    
    Real Estate Segment
    
    
    All other (a)
    
    
    TotalOperating revenues
    
    $
    2,918
    
    
    $
    212
    
    
    $
    187
    
    
    $
    3,317Purchased power and fuel costs
    
    
    1,141
    
    
    
    
    
    
    
    100
    
    
    
    1,241Other operating expenses
    
    
    836
    
    
    
    193
    
    
    
    60
    
    
    
    1,089Operating margin
    
    
    941
    
    
    
    19
    
    
    
    27
    
    
    
    987Depreciation and amortization
    
    
    366
    
    
    
    4
    
    
    
    2
    
    
    
    372Interest expense
    
    
    180
    
    
    
    4
    
    
    
    1
    
    
    
    185Other expense (income)
    
    
    (18
    )
    
    
    (10
    )
    
    
    8
    
    
    
    (20
    )Income from
continuing operations before income taxes
    
    
    413
    
    
    
    21
    
    
    
    16
    
    
    
    450Income taxes
    
    
    139
    
    
    
    7
    
    
    
    5
    
    
    
    151Income from continuing operations
    
    
    274
    
    
    
    14
    
    
    
    11
    
    
    
    299Income from discontinued
operations  net of income
tax expense of $6 million
(see Note 22)
    
    
    
    
    
    
    9
    
    
    
    (1
    )
    
    
    8Net income
    
    $
    274
    
    
    $
    23
    
    
    $
    10
    
    
    $
    307Total assets
    
    $
    10,356
    
    
    $
    661
    
    
    $
    145
    
    
    $
    11,162Capital expenditures
    
    $
    900
    
    
    $
    161
    
    
    $
    3
    
    
    $
    1,064
 133




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Business Segments for the Year Ended December 31, 2006RegulatedElectricity
    
    
    Real EstateSegment
    
    
    Segment
    
    
    All other (a)
    
    
    TotalOperating revenues
    
    $
    2,635
    
    
    $
    400
    
    
    $
    173
    
    
    $
    3,208Purchased power and fuel costs
    
    
    960
    
    
    
    
    
    
    
    106
    
    
    
    1,066Other operating expenses
    
    
    791
    
    
    
    325
    
    
    
    50
    
    
    
    1,166Operating margin
    
    
    884
    
    
    
    75
    
    
    
    17
    
    
    
    976Depreciation and amortization
    
    
    354
    
    
    
    3
    
    
    
    2
    
    
    
    359Interest expense
    
    
    173
    
    
    
    1
    
    
    
    2
    
    
    
    176Other expense (income)
    
    
    (22
    )
    
    
    (11
    )
    
    
    2
    
    
    
    (31
    )Income from
continuing operations
before income taxes
    
    
    379
    
    
    
    82
    
    
    
    11
    
    
    
    472Income taxes
    
    
    120
    
    
    
    32
    
    
    
    4
    
    
    
    156Income from continuing operations
    
    
    259
    
    
    
    50
    
    
    
    7
    
    
    
    316Income from discontinued
operations  net of income
tax expense of $7 million
(see Note 22)
    
    
    
    
    
    
    10
    
    
    
    1
    
    
    
    11Net income
    
    $
    259
    
    
    $
    60
    
    
    $
    8
    
    
    $
    327Capital expenditures
    
    $
    662
    
    
    $
    201
    
    
    $
    7
    
    
    $
    870
 
 (a)
    
    All other activities relate to marketing and trading, APSES, Silverhawk and El
Dorado. Income from discontinued operations for 2008 is primarily related to the
resolution of certain tax issues associated with the sale of Silverhawk in 2005. None
of these segments is a reportable segment. 18. Derivative and Energy Trading Accounting
   134




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       135




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Cash Flow Hedges
  2008
    
    2007
    
    2006Gains (losses) on the ineffective
portion of
derivatives qualifying for hedge
accounting
    
    $
    (1,874
    )
    
    $
    1,430
    
    
    $
    (5,666
    )Losses from the change in options
time value excluded from measurement
of effectiveness
    
    
    
    
    
    
    
    
    
    
    (10
    )Gains from the discontinuance of
Cash flow hedges
    
    
    
    
    
    
    320
    
    
    
    453
   Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetDecember 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
    
    
    
    69,605Collateral
provided to
counterparties
    
    
    400
    
    
    
    
    
    
    
    71,008
    
    
    
    13,552
    
    
    
    84,960Collateral
provided from
counterparties
    
    
    (1,800
    )
    
    
    
    
    
    
    (251
    )
    
    
    
    
    
    
    (2,051
    )Total
    
    $
    32,581
    
    
    $
    33,675
    
    
    $
    (69,585
    )
    
    $
    (126,532
    )
    
    $
    (129,861
    )
 136




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetDecember 31, 2007
    
    Assets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Mark-to-market
    
    $
    26,333
    
    
    $
    48,928
    
    
    $
    (30,786
    )
    
    $
    (4,701
    )
    
    $
    39,774Margin account
    
    
    30,650
    
    
    
    
    
    
    
    6,148
    
    
    
    
    
    
    
    36,798Collateral
provided to counterparties
    
    
    622
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    750Collateral
provided from counterparties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    57,605
    
    
    $
    48,928
    
    
    $
    (24,510
    )
    
    $
    (4,701
    )
    
    $
    77,322
  Credit Risk
   19. Other Income and Other Expense
  137




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2008
    
    
    2007
    
    
    2006Other income:Interest income
    
    
    
    
    
    $
    7,602
    
    
    $
    11,656
    
    
    $
    18,862SunCor other income (a)
    
    
    
    
    
    
    2,499
    
    
    
    10,702
    
    
    
    10,881SO2 emission allowance sales and
other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,782Investment gains  net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,554Miscellaneous
    
    
    
    
    
    
    1,977
    
    
    
    2,336
    
    
    
    949Total other income
    
    
    
    
    
    $
    12,078
    
    
    $
    24,694
    
    
    $
    44,028Other 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
    21. Guarantees
  138




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Guarantees
    
    
    Surety BondsTerm
    
    
    
    
    
    
    TermAmount
    
    
    (in years)
    
    
    Amount
    
    
    (in years)Parental:Pinnacle West Marketing & Trading
    
    $
    2
    
    
    
    1
    
    
    $
    
    
    
    
    APSES
    
    
    14
    
    
    
    1
    
    
    
    11
    
    
    
    1APS
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    1Total
    
    $
    16
    
    
    
    
    
    
    $
    22
    22. Discontinued Operations
 SunCor 
 139




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Silverhawk
 Other 
  2008
    
    
    2007
    
    
    2006Revenue:SunCor  commercial operations
    
    $
    1
    
    
    $
    6
    
    
    $
    3Other (primarily APSES) (a)
    
    
    67
    
    
    
    204
    
    
    
    195Total revenue
    
    $
    68
    
    
    $
    210
    
    
    $
    198Income (loss) before taxes:SunCor  commercial operations
    
    $
    37
    
    
    $
    15
    
    
    $
    17Silverhawk
    
    
    13
    
    
    
    
    
    
    
    1Other (primarily APSES)
    
    
    (3
    )
    
    
    (1
    )
    
    
    Total income before taxes
    
    $
    47
    
    
    $
    14
    
    
    $
    18Income (loss) after taxes:SunCor  commercial operations
    
    $
    23
    
    
    $
    9
    
    
    $
    10Silverhawk
    
    
    8
    
    
    
    
    
    
    
    Other (primarily APSES)
    
    
    (3
    )
    
    
    (1
    )
    
    
    1Total income after taxes
    
    $
    28
    
    
    $
    8
    
    
    $
    11
 
 (a)
    
    APSES discontinued its commodity-related energy services in 2008 and the
associated revenues and costs were reclassified to discontinued operations in 2008,
2007 and 2006. 23. Real Estate Impairment Charge
  140




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  141




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(ARIZONA PUBLIC SERVICE COMPANY)
 Internal Control  Integrated Framework Internal Control  Integrated Framework,
  142




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control  Integrated Framework
   143




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##### Table of Contents



Internal Control  Integrated Framework
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans,
 /s/  Deloitte & Touche LLPDELOITTE & TOUCHE LLPPhoenix, ArizonaFebruary 19, 2009 144




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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(dollars in thousands)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006ELECTRIC OPERATING REVENUES
    
    $
    3,133,496
    
    
    $
    2,936,277
    
    
    $
    2,658,513OPERATING EXPENSESFuel and purchased power
    
    
    1,289,883
    
    
    
    1,151,392
    
    
    
    969,767Operations and maintenance
    
    
    787,270
    
    
    
    710,077
    
    
    
    665,631Depreciation and amortization
    
    
    383,098
    
    
    
    365,430
    
    
    
    353,057Income taxes (Notes 4 and S-1)
    
    
    113,799
    
    
    
    155,735
    
    
    
    144,127Other taxes
    
    
    124,046
    
    
    
    127,648
    
    
    
    127,989Total
    
    
    2,698,096
    
    
    
    2,510,282
    
    
    
    2,260,571OPERATING INCOME
    
    
    435,400
    
    
    
    425,995
    
    
    
    397,942OTHER INCOME (DEDUCTIONS)Income taxes (Notes 4 and S-1)
    
    
    6,538
    
    
    
    4,578
    
    
    
    5,200Allowance for equity funds used
during construction
    
    
    18,636
    
    
    
    21,195
    
    
    
    14,312Other income (Note S-4)
    
    
    6,231
    
    
    
    16,727
    
    
    
    31,902Other expense (Note S-4)
    
    
    (30,569
    )
    
    
    (21,630
    )
    
    
    (23,830
    )Total
    
    
    836
    
    
    
    20,870
    
    
    
    27,584INTEREST DEDUCTIONSInterest on long-term debt
    
    
    170,071
    
    
    
    161,030
    
    
    
    149,240Interest on short-term borrowings
    
    
    13,432
    
    
    
    9,564
    
    
    
    9,529Debt discount, premium and expense
    
    
    4,702
    
    
    
    4,639
    
    
    
    4,363Allowance for borrowed funds used
during construction
    
    
    (14,313
    )
    
    
    (12,308
    )
    
    
    (7,336
    )Total
    
    
    173,892
    
    
    
    162,925
    
    
    
    155,796NET INCOME
    
    $
    262,344
    
    
    $
    283,940
    
    
    $
    269,730
  145




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##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)
 December 31,2008
    
    
    2007ASSETSUTILITY PLANT (Notes 1, 6, 9 and 10)Electric plant in service and held for future use
    
    $
    12,198,010
    
    
    $
    11,582,862Less accumulated depreciation and amortization
    
    
    4,129,958
    
    
    
    3,994,777Net
    
    
    8,068,052
    
    
    
    7,588,085Construction work in progress
    
    
    571,977
    
    
    
    622,693Intangible assets, net of accumulated amortization of
$280,633 and $250,268
    
    
    131,243
    
    
    
    105,225Nuclear fuel, net of accumulated amortization of
$55,343 and $68,375
    
    
    89,323
    
    
    
    69,271Total utility plant
    
    
    8,860,595
    
    
    
    8,385,274INVESTMENTS AND OTHER ASSETSNuclear decommissioning trust (Note 12)
    
    
    343,052
    
    
    
    379,347Assets from risk management and trading activities
(Note S-3)
    
    
    33,675
    
    
    
    41,603Other assets
    
    
    60,604
    
    
    
    69,570Total investments and other assets
    
    
    437,331
    
    
    
    490,520CURRENT ASSETSCash and cash equivalents
    
    
    71,544
    
    
    
    52,151Customer and other receivables
    
    
    262,177
    
    
    
    295,371Accrued utility revenues
    
    
    100,089
    
    
    
    106,873Allowance for doubtful accounts
    
    
    (3,155
    )
    
    
    (4,265
    )Materials and supplies (at average cost)
    
    
    173,252
    
    
    
    149,759Fossil fuel (at average cost)
    
    
    29,752
    
    
    
    27,792Assets from risk management and trading activities
(Note S-3)
    
    
    32,181
    
    
    
    34,087Deferred income taxes (Notes 4 and S-1)
    
    
    79,694
    
    
    
    38,707Other
    
    
    19,866
    
    
    
    16,545Total current assets
    
    
    765,400
    
    
    
    717,020DEFERRED DEBITSDeferred fuel and purchased power regulatory asset
(Notes 1, 3, 4 and S-1)
    
    
    7,984
    
    
    
    110,928Other regulatory assets (Notes 1, 3, 4 and S-1)
    
    
    787,506
    
    
    
    514,353Unamortized debt issue costs
    
    
    22,026
    
    
    
    24,373Other
    
    
    82,735
    
    
    
    78,934Total deferred debits
    
    
    900,251
    
    
    
    728,588TOTAL ASSETS
    
    $
    10,963,577
    
    
    $
    10,321,402
  146




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ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)
 December 31,2008
    
    
    2007LIABILITIES AND EQUITYCAPITALIZATIONCommon stock
    
    $
    178,162
    
    
    $
    178,162Additional paid-in capital (Note 3)
    
    
    2,117,789
    
    
    
    2,105,466Retained earnings
    
    
    1,168,901
    
    
    
    1,076,557Accumulated other comprehensive income (loss):Pension and other postretirement benefits (Note 8)
    
    
    (26,960
    )
    
    
    (21,782
    )Derivative instruments
    
    
    (98,742
    )
    
    
    13,038Common stock equity
    
    
    3,339,150
    
    
    
    3,351,441Long-term debt less current maturities (Note 6)
    
    
    2,850,242
    
    
    
    2,876,881Total capitalization
    
    
    6,189,392
    
    
    
    6,228,322CURRENT LIABILITIESShort-term borrowings
    
    
    521,684
    
    
    
    218,000Current maturities of long-term debt (Note 6)
    
    
    874
    
    
    
    978Accounts payable
    
    
    233,529
    
    
    
    239,923Accrued taxes
    
    
    219,129
    
    
    
    374,444Accrued interest
    
    
    39,860
    
    
    
    38,262Customer deposits
    
    
    77,452
    
    
    
    71,376Liabilities from risk management and trading
activities (Note S-3)
    
    
    69,585
    
    
    
    19,921Other
    
    
    105,655
    
    
    
    92,802Total current liabilities
    
    
    1,267,768
    
    
    
    1,055,706DEFERRED CREDITS AND OTHERDeferred income taxes (Notes 4 and S-1)
    
    
    1,401,412
    
    
    
    1,250,028Regulatory liabilities (Notes 1, 3, 4, and S-1)
    
    
    587,586
    
    
    
    642,564Liability for asset retirements (Note 12)
    
    
    275,970
    
    
    
    281,903Liabilities for pension and other postretirement
benefits (Note 8)
    
    
    635,327
    
    
    
    469,945Customer advances for construction
    
    
    132,023
    
    
    
    94,801Liabilities from risk management and trading
activities (Note S-3)
    
    
    126,532
    
    
    
    4,573Other
    
    
    347,567
    
    
    
    293,560Total deferred credits and other
    
    
    3,506,417
    
    
    
    3,037,374COMMITMENTS AND CONTINGENCIES (SEE NOTES)TOTAL LIABILITIES AND EQUITY
    
    $
    10,963,577
    
    
    $
    10,321,402
  147




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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(dollars in thousands)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    262,344
    
    
    $
    283,940
    
    
    $
    269,730Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization including nuclear fuel
    
    
    416,709
    
    
    
    395,890
    
    
    
    381,173Deferred fuel and purchased power
    
    
    (80,183
    )
    
    
    (196,136
    )
    
    
    (252,849
    )Deferred fuel and purchased power amortization
    
    
    183,126
    
    
    
    231,106
    
    
    
    265,337Deferred 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
    )
    
    
    6,893Changes in current assets and liabilities:Customer and other receivables
    
    
    47,566
    
    
    
    23,882
    
    
    
    20,970Materials, supplies and fossil fuel
    
    
    (25,453
    )
    
    
    (29,776
    )
    
    
    (14,381
    )Other current assets
    
    
    128
    
    
    
    (8,056
    )
    
    
    3,666Accounts payable
    
    
    (5,915
    )
    
    
    (2,797
    )
    
    
    5,825Other current liabilities
    
    
    8,150
    
    
    
    34,033
    
    
    
    68,803Change 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
    )
    
    
    2,828Change in other long-term liabilities
    
    
    36,765
    
    
    
    48,718
    
    
    
    22,175Net cash flow provided by operating activities
    
    
    785,260
    
    
    
    765,815
    
    
    
    393,713CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (910,189
    )
    
    
    (924,166
    )
    
    
    (699,946
    )Contributions in aid of construction
    
    
    60,292
    
    
    
    41,809
    
    
    
    51,203Allowance for borrowed funds used during construction
    
    
    (14,313
    )
    
    
    (12,308
    )
    
    
    (7,336
    )Proceeds from sale of investment securities
    
    
    
    
    
    
    69,225
    
    
    
    1,259,203Purchases of investment securities
    
    
    
    
    
    
    (36,525
    )
    
    
    (1,291,903
    )Proceeds from nuclear decommissioning trust sales
    
    
    317,619
    
    
    
    259,026
    
    
    
    254,651Investment 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 ACTIVITIESIssuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    395,481Short-term borrowings  net
    
    
    303,684
    
    
    
    218,000
    
    
    
    Equity infusion
    
    
    7,601
    
    
    
    39,548
    
    
    
    212,820Dividends 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
    
    
    
    352,215NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    19,393
    
    
    
    (29,719
    )
    
    
    31,937CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    52,151
    
    
    
    81,870
    
    
    
    49,933CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    71,544
    
    
    $
    52,151
    
    
    $
    81,870Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes, net of refunds
    
    $
    56,728
    
    
    $
    186,183
    
    
    $
    117,831Interest, net of amounts capitalized
    
    $
    167,592
    
    
    $
    165,279
    
    
    $
    131,183
  148




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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)
 Year Ended December 31,2008
    
    
    2007
    
    
    2006COMMON STOCK
    
    $
    178,162
    
    
    $
    178,162
    
    
    $
    178,162ADDITIONAL PAID-IN CAPITAL
    
    
    2,117,789
    
    
    
    2,105,466
    
    
    
    2,065,918RETAINED EARNINGSBalance at beginning of year
    
    
    1,076,557
    
    
    
    960,405
    
    
    
    860,675Net income
    
    
    262,344
    
    
    
    283,940
    
    
    
    269,730Common 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
    
    
    
    960,405ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)Balance at beginning of year
    
    
    (8,744
    )
    
    
    2,988
    
    
    
    93,290Pension 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
    
    
    
    
    
    
    
    
    
    
    42,731Adjustment to reflect a change in accounting
(SFAS No. 158), net of tax expense of $27,760
    
    
    
    
    
    
    
    
    
    
    43,401Derivative 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 tax expense (benefit) of
($16,890), $5,164, and ($1,657)
    
    
    (26,110
    )
    
    
    8,010
    
    
    
    (2,562
    )Balance at end of year
    
    
    (125,702
    )
    
    
    (8,744
    )
    
    
    2,988TOTAL COMMON STOCK EQUITY
    
    $
    3,339,150
    
    
    $
    3,351,441
    
    
    $
    3,207,473COMPREHENSIVE INCOMENet income
    
    $
    262,344
    
    
    $
    283,940
    
    
    $
    269,730Other comprehensive loss
    
    
    (116,958
    )
    
    
    (11,732
    )
    
    
    (133,703
    )Total comprehensive income
    
    $
    145,386
    
    
    $
    272,208
    
    
    $
    136,027
  149




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Consolidated
    
    APS SupplementalFootnote Reference
    
    Footnote ReferenceSummary 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
    
    
 150




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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
 S-1. Income Taxes
      2008
    
    
    2007Total unrecognized tax benefits, January 1
    
    $
    154,473
    
    
    $
    126,700Additions for tax positions of the current year
    
    
    12,893
    
    
    
    Additions for tax positions of prior years
    
    
    32,481
    
    
    
    66,610Reductions 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
 151




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##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
      Year Ended December 31,2008
    
    
    2007
    
    
    2006Current:Federal
    
    $
    (54,719
    )
    
    $
    168,607
    
    
    $
    114,971State
    
    
    16,823
    
    
    
    27,028
    
    
    
    21,442Total current
    
    
    (37,896
    )
    
    
    195,635
    
    
    
    136,413Deferred
    
    
    145,157
    
    
    
    (44,478
    )
    
    
    2,514Total income tax expense
    
    $
    107,261
    
    
    $
    151,157
    
    
    $
    138,927
   152




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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006Federal income tax expense at 35%
statutory rate
    
    $
    129,362
    
    
    $
    152,284
    
    
    $
    143,030Increases (reductions) in tax expense
resulting from:State income tax net of federal income
tax benefit
    
    
    14,956
    
    
    
    17,540
    
    
    
    15,684Credits 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
  December 31,2008
    
    
    2007Current asset
    
    $
    79,694
    
    
    $
    38,707Long-term liability
    
    
    (1,401,412
    )
    
    
    (1,250,028
    )Accumulated deferred
income taxes  net
    
    $
    (1,321,718
    )
    
    $
    (1,211,321
    )
 153




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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
  December 31,2008
    
    
    2007DEFERRED TAX ASSETSRegulatory liabilities:Asset retirement obligation
    
    $
    194,326
    
    
    $
    214,607Federal excess deferred income tax
    
    
    9,428
    
    
    
    11,091Tax benefit of Medicare subsidy
    
    
    4,197
    
    
    
    11,727Other
    
    
    9,789
    
    
    
    26,579Risk management and trading activities
    
    
    132,383
    
    
    
    12,112Pension and other postretirement
liabilities
    
    
    265,156
    
    
    
    197,620Deferred gain on Palo Verde Unit 2
sale-leaseback
    
    
    12,665
    
    
    
    14,408Other
    
    
    110,019
    
    
    
    116,491Total deferred tax assets
    
    
    737,963
    
    
    
    604,635DEFERRED TAX LIABILITIESPlant-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
    )Accumulated deferred income taxes  net
    
    $
    (1,321,718
    )
    
    $
    (1,211,321
    )
 154




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##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
 S-2. Selected Quarterly Financial Data (Unaudited)
  2008 Quarter Ended,
    
    2008March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalOperating revenues
    
    $
    625,576
    
    
    $
    831,083
    
    
    $
    1,042,084
    
    
    $
    634,753
    
    
    $
    3,133,496Operations and maintenance
    
    
    188,135
    
    
    
    187,819
    
    
    
    206,526
    
    
    
    204,790
    
    
    
    787,270Operating income
    
    
    33,628
    
    
    
    163,860
    
    
    
    202,655
    
    
    
    35,257
    
    
    
    435,400Net income
    
    
    (6,364
    )
    
    
    125,382
    
    
    
    159,754
    
    
    
    (16,428
    )
    
    
    262,344
 2007 Quarter Ended,
    
    2007March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalOperating revenues
    
    $
    538,260
    
    
    $
    721,759
    
    
    $
    1,047,062
    
    
    $
    629,196
    
    
    $
    2,936,277Operations and maintenance
    
    
    165,934
    
    
    
    170,631
    
    
    
    171,963
    
    
    
    201,549
    
    
    
    710,077Operating income
    
    
    40,589
    
    
    
    109,643
    
    
    
    238,144
    
    
    
    37,619
    
    
    
    425,995Net income
    
    
    4,317
    
    
    
    75,090
    
    
    
    204,257
    
    
    
    276
    
    
    
    283,940
 S-3. Derivative and Energy Trading Accounting
  Cash Flow Hedges
  2008
    
    2007
    
    2006Gains (losses) on the ineffective
portion of
derivatives qualifying for hedge
accounting
    
    $
    (1,874
    )
    
    $
    1,430
    
    
    $
    (5,666
    )Losses from the change in options
time value excluded from measurement
of effectiveness
    
    
    
    
    
    
    
    
    
    
    (10
    )Gains from the discontinuance of
cash flow hedges
    
    
    
    
    
    
    150
    
    
    
    178
  155




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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
  Investments
    
    
    
    
    
    
    Deferredand Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetDecember 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
    
    
    
    69,605Collateral
provided to
counterparties
    
    
    
    
    
    
    
    
    
    
    71,008
    
    
    
    13,552
    
    
    
    84,560Collateral
provided from
counterparties
    
    
    (1,800
    )
    
    
    
    
    
    
    (251
    )
    
    
    
    
    
    
    (2,051
    )Total
    
    $
    32,181
    
    
    $
    33,675
    
    
    $
    (69,585
    )
    
    $
    (126,532
    )
    
    $
    (130,261
    )
 Investments
    
    
    
    
    
    
    Deferredand Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetDecember 31, 2007
    
    Current Assets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Mark-to-market
    
    $
    2,815
    
    
    $
    41,603
    
    
    $
    (26,197
    )
    
    $
    (4,573
    )
    
    $
    13,648Margin account
    
    
    30,650
    
    
    
    
    
    
    
    6,148
    
    
    
    
    
    
    
    36,798Collateral
provided to
counterparties
    
    
    622
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    750Collateral
provided from
counterparties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    34,087
    
    
    $
    41,603
    
    
    $
    (19,921
    )
    
    $
    (4,573
    )
    
    $
    51,196
   S-4. Other Income and Other Expense
  156




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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
 2008
    
    
    2007
    
    
    2006Other income:Interest income
    
    $
    3,863
    
    
    $
    10,961
    
    
    $
    16,526SO2 emission allowance
sales and other (a)
    
    
    392
    
    
    
    1,001
    
    
    
    10,782Investment gains  net
    
    
    
    
    
    
    2,429
    
    
    
    3,645Miscellaneous
    
    
    1,976
    
    
    
    2,336
    
    
    
    949Total other income
    
    $
    6,231
    
    
    $
    16,727
    
    
    $
    31,902Other 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 utility rate recovery). S-5. Related Party Transactions
  Year Ended December 31,2008
    
    2007
    
    2006Electric operating revenues:Pinnacle West Marketing & Trading (a)
    
    $
    4
    
    
    $
    4
    
    
    $
    6Other:Equity infusion from Pinnacle West
    
    $
    8
    
    
    $
    40
    
    
    $
    210
 
 (a)
    
    Pinnacle West Marketing & Trading ended operations December 2008. These operations were
conducted by a division of Pinnacle West through the end of 2006. By the end of 2008,
substantially all the contracts were transferred to APS or expired. As of December 31,2008
    
    
    2007Net affiliate receivables (payables):Pinnacle West Marketing & Trading (a)
    
    $
    (1
    )
    
    $
    11Pinnacle West
    
    
    (11
    )
    
    
    (9
    )Total
    
    $
    (12
    )
    
    $
    2
 
 (a)
    
    Pinnacle West Marketing & Trading began operations in early 2007. These operations
were conducted by a division of Pinnacle West through the end of 2006. By the end of 2008,
substantially all the contracts were transferred to APS or expired. 157




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ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
     158




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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
 Year Ended December 31,2008
    
    
    2007(a)
    
    
    2006Operating revenues
    
    $
    52
    
    
    $
    6,708
    
    
    $
    119,224Operating expensesFuel and purchased power
    
    
    (19,970
    )
    
    
    (35,541
    )
    
    
    101,360Other operating expenses
    
    
    9,016
    
    
    
    5,659
    
    
    
    9,607Total
    
    
    (10,954
    )
    
    
    (29,882
    )
    
    
    110,967Operating income
    
    
    11,006
    
    
    
    36,590
    
    
    
    8,257OtherEquity in earnings of subsidiaries
    
    
    226,893
    
    
    
    287,078
    
    
    
    324,504Other income
    
    
    1,248
    
    
    
    225
    
    
    
    2,208Total
    
    
    228,141
    
    
    
    287,303
    
    
    
    326,712Interest expense
    
    
    17,550
    
    
    
    17,190
    
    
    
    20,522Income from continuing operations
    
    
    221,597
    
    
    
    306,703
    
    
    
    314,447Income tax benefit
    
    
    (12,374
    )
    
    
    (440
    )
    
    
    (12,898
    )Income from continuing operations  net of
income taxes
    
    
    233,971
    
    
    
    307,143
    
    
    
    327,345Income (loss) from discontinued operations
    
    
    8,154
    
    
    
    
    
    
    
    (90
    )Net income
    
    $
    242,125
    
    
    $
    307,143
    
    
    $
    327,255
 
 (a)
    
    Pinnacle West Marketing & Trading began operations in early 2007. These operations were
conducted by a division of Pinnacle West through the end of 2006. By the end of 2008,
substantially all the contracts were transferred to APS or expired. 159




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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
 Balance at December 31,2008
    
    
    2007 (a)AssetsCurrent assetsCash and cash equivalents
    
    $
    6,262
    
    
    $
    137Customer and other receivables
    
    
    65,576
    
    
    
    82,003Other current assets
    
    
    367
    
    
    
    1,262Total current assets
    
    
    72,205
    
    
    
    83,402Investments and other assetsInvestments in subsidiaries
    
    
    3,661,710
    
    
    
    3,711,737Deferred income taxes
    
    
    
    
    
    
    11,806Other assets
    
    
    20,029
    
    
    
    23,591Total investments and other assets
    
    
    3,681,739
    
    
    
    3,747,134Total Assets
    
    $
    3,753,944
    
    
    $
    3,830,536Liabilities and Common Stock EquityCurrent liabilitiesAccounts payable
    
    $
    6,310
    
    
    $
    22,177Accrued taxes
    
    
    (96,188
    )
    
    
    (86,081
    )Short-term borrowings
    
    
    144,000
    
    
    
    115,000Deferred income taxes
    
    
    
    
    
    
    7,682Liabilities from risk management and
trading activities
    
    
    
    
    
    
    2Other current liabilities
    
    
    8,027
    
    
    
    18,019Total current liabilities
    
    
    62,149
    
    
    
    76,799Long-term debt less current maturities
    
    
    175,000
    
    
    
    175,000Deferred credits and otherDeferred income taxes
    
    
    18,027
    
    
    
    Pension and other postretirement liabilities
    
    
    27,300
    
    
    
    22,248Other
    
    
    25,489
    
    
    
    24,878Total deferred credits and other
    
    
    70,816
    
    
    
    47,126Common stock equityCommon stock
    
    
    2,148,469
    
    
    
    2,133,733Accumulated other comprehensive income (loss)
    
    
    (146,698
    )
    
    
    (15,863
    )Retained earnings
    
    
    1,444,208
    
    
    
    1,413,741Total common stock equity
    
    
    3,445,979
    
    
    
    3,531,611Total Liabilities and Common Stock Equity
    
    $
    3,753,944
    
    
    $
    3,830,536
 
 (a)
    
    Pinnacle West Marketing & Trading began operations in early 2007. These operations were
conducted by a division of Pinnacle West through the end of 2006. By the end of 2008,
substantially all the contracts were transferred to APS or expired. 160




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PINNACLE WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
 Year Ended December 312008
    
    
    2007(a)
    
    
    2006Cash flows from operating activitiesNet Income
    
    $
    242,125
    
    
    $
    307,143
    
    
    $
    327,255Adjustments 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
    
    
    
    470Deferred income taxes
    
    
    31,954
    
    
    
    (24,192
    )
    
    
    30,384Change in mark-to-market valuations
    
    
    (19,975
    )
    
    
    53,228
    
    
    
    21,698Customer and other receivables
    
    
    38,938
    
    
    
    112,543
    
    
    
    2,816Accounts payable
    
    
    (14,134
    )
    
    
    (57,978
    )
    
    
    (55,675
    )Accrued taxes
    
    
    (5,230
    )
    
    
    25,127
    
    
    
    (49,529
    )Change in margin and collateral accounts  net
    
    
    
    
    
    
    (11,602
    )
    
    
    75,605Other 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 activitiesInvestments in subsidiaries
    
    
    (18,765
    )
    
    
    (83,993
    )
    
    
    (4,677
    )Repayments of loans from subsidiaries
    
    
    10,194
    
    
    
    14,996
    
    
    
    18,065Advances of loans to subsidiaries
    
    
    (22,554
    )
    
    
    (19,796
    )
    
    
    (15,379
    )Dividends received from subsidiaries
    
    
    170,000
    
    
    
    180,000
    
    
    
    180,000Purchases of investment securities
    
    
    
    
    
    
    
    
    
    
    (147,501
    )Proceeds from sale of investment securities
    
    
    
    
    
    
    
    
    
    
    147,501Net cash flow  provided by
investing activities
    
    
    138,875
    
    
    
    91,207
    
    
    
    178,009Cash flows from financing activitiesIssuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    175,000Short-term borrowings and payments  net
    
    
    28,729
    
    
    
    87,371
    
    
    
    27,900Dividends 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
    
    
    
    35,834Net 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
    
    
    
    85,374Cash and cash equivalents at end of year
    
    $
    6,262
    
    
    $
    137
    
    
    $
    11
 
 (a)
    
    Pinnacle West Marketing & Trading began operations in early 2007. These operations were
conducted by a division of Pinnacle West through the end of 2006. By the end of 2008,
substantially all the contracts were transferred to APS or expired. 161




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PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II  RESERVE FOR UNCOLLECTIBLES
 Column CColumn B
    
    Additions
    
    
    
    
    
    Column EBalance at
    
    Charged to
    
    Charged
    
    
    
    
    
    BalanceColumn A
    
    beginning
    
    cost and
    
    to other
    
    Column D
    
    at end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    periodReserve for uncollectibles:2008
    
    $
    4,782
    
    
    $
    6,177
    
    
    $
    
    
    
    $
    7,576
    
    
    $
    3,3832007
    
    
    5,597
    
    
    
    4,130
    
    
    
    
    
    
    
    4,945
    
    
    
    4,7822006
    
    
    4,979
    
    
    
    4,096
    
    
    
    
    
    
    
    3,478
    
    
    
    5,597
 162




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##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE II  RESERVE FOR UNCOLLECTIBLES
 Column CColumn B
    
    Additions
    
    
    
    
    
    Column EBalance at
    
    Charged to
    
    Charged
    
    
    
    
    
    BalanceColumn A
    
    beginning
    
    cost and
    
    to other
    
    Column D
    
    at end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    periodReserve for uncollectibles:2008
    
    $
    4,265
    
    
    $
    5,924
    
    
    $
    
    
    
    $
    7,034
    
    
    $
    3,1552007
    
    
    4,223
    
    
    
    5,059
    
    
    
    
    
    
    
    5,017
    
    
    
    4,2652006
    
    
    3,568
    
    
    
    4,096
    
    
    
    
    
    
    
    3,441
    
    
    
    4,223
 163




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  et seq
         164




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE OF PINNACLE WEST
  www.pinnaclewest.com
 
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
  165




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##### Table of Contents



Securities Authorized for Issuance Under Equity Compensation Plans
  EQUITY COMPENSATION PLAN INFORMATION
 Number of securitiesremaining availablefor future issuanceNumber of securities
    
    
    Weighted-average
    
    
    under equityto be issued upon
    
    
    exercise price of
    
    
    compensation plansexercise of
    
    
    outstanding
    
    
    (excluding securitiesoutstanding options,
    
    
    options, warrants
    
    
    reflected in columnwarrants and rights
    
    
    and rights
    
    
    (a))Plan Category
    
    (a)1
    
    
    (b)2
    
    
    (c)3Equity compensation
plans approved by
security holders
    
    
    1,987,375
    
    
    $
    39.81
    
    
    
    7,078,187Equity 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 share awards and restricted stock unit awards at the maximum amount of
shares issuable under such awards. However, payout of the performance share awards is contingent
on the Company reaching certain levels of performance during a three-year performance period. If
the performance criteria for these awards are not fully satisfied, the award recipient will receive
less than the maximum number of shares available under these grants and may receive nothing from
these grants.2
    
    The weighted average exercise price in this column does not take performance share
awards or restricted stock unit awards 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 share units, performance cash, stock grants, dividend equivalents,
and restricted stock units.. Equity Compensation Plans Approved By Security Holders
  166




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##### Table of Contents



Equity Compensation Plans Not Approved By Security Holders
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
 Pinnacle West
  APS
  Type of Service
    
    2007
    
    2008Audit Fees (1)
    
    $
    1,921,601
    
    
    $
    1,935,056Audit-Related Fees (2)
    
    
    178,840
    
    
    
    233,025Tax 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 financial statements 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 of the financial statements that are not included in Audit
Fees reported above, which primarily consist of fees for employee benefit plan audits.(3)
    
    The aggregate fees billed primarily for tax compliance and tax planning.  167




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168




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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Financial Statements and Financial Statement Schedules
  Exhibits Filed
  Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as
Exhibit:a
    
    Filed3.1
    
    Pinnacle West
    
    Articles of
Incorporation,
restated as of May
21, 2008
    
    3.1 to Pinnacle West/APS June 30, 2008
Form 10-Q Report, File Nos. 1-8962 and
1-4473
    
    8-7-083.2
    
    Pinnacle West
    
    Pinnacle West
Capital Corporation
Bylaws, amended as
of January 21, 20093.3
    
    APS
    
    Articles of
Incorporation,
restated as of May
25, 1988
    
    4.2 to APS Form S-3 Registration Nos.
33-33910 and 33-55248 by means of
September 24, 1993 Form 8-K Report, File
No. 1-4473
    
    9-29-933.4
    
    APS
    
    Arizona Public
Service Company
Bylaws, amended as
of December 16,
20084.1
    
    Pinnacle West
    
    Specimen
Certificate of
Pinnacle West
Capital Corporation
Common Stock, no
par value
    
    4.12 to Pinnacle West April 29, 2005
Form 8-K Report, File No. 1-8962
    
    5-2-05
 169




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as
Exhibit:a
    
    Filed4.2
    
    Pinnacle West
APS
    
    Indenture dated as
of January 1, 1995
among APS and The
Bank of New York
Mellon, as Trustee
    
    4.6 to APS Registration Statement Nos.
33-61228 and 33-55473 by means of
January 1, 1995 Form 8-K Report, File
No. 1-4473
    
    1-11-954.2a
    
    Pinnacle West
APS
    
    First Supplemental
Indenture dated as
of January 1, 1995
    
    4.4 to APS Registration Statement Nos.
33-61228 and 33-55473 by means of
January 1, 1995 Form 8-K Report, File
No. 1-4473
    
    1-11-954.3
    
    Pinnacle West
APS
    
    Indenture dated as
of November 15,
1996 between APS
and The Bank of New
York, as Trustee
    
    4.5 to APS Registration Statements Nos.
33-61228, 33-55473, 33-64455 and 333-
15379 by means of November 19, 1996 Form
8-K Report, File No. 1-4473
    
    11-22-964.3a
    
    Pinnacle West
APS
    
    First Supplemental
Indenture dated as
of November 15,
1996
    
    4.6 to APS Registration Statements Nos.
33-61228, 33-55473, 33-64455 and
333-15379 by means of November 19, 1996
Form 8-K Report, File No. 1-4473
    
    11-22-964.3b
    
    Pinnacle West
APS
    
    Second Supplemental
Indenture dated as
of April 1, 1997
    
    4.10 to APS Registration Statement Nos.
33-55473, 33-64455 and 333-15379 by
means of April 7, 1997 Form 8-K Report,
File No. 1-4473
    
    4-9-974.3c
    
    Pinnacle West
APS
    
    Third Supplemental
Indenture dated as
of November 1, 2002
    
    10.2 to Pinnacle Wests March 31, 2003
Form 10-Q Report, File No. 1-8962
    
    5-15-03
 170




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as
Exhibit:a
    
    Filed4.4
    
    Pinnacle West
    
    Indenture dated as
of December 1, 2000
between the Company
and The Bank of New
York, as Trustee,
relating to Senior
Unsecured Debt
Securities
    
    4.1 to Pinnacle Wests Registration
Statement No. 333-52476
    
    12-21-004.5
    
    Pinnacle West
    
    Indenture dated as
of December 1, 2000
between the Company
and The Bank of New
York, as Trustee,
relating to
Subordinated
Unsecured Debt
Securities
    
    4.2 to Pinnacle Wests Registration
Statement No. 333-52476
    
    12-21-004.6
    
    Pinnacle West
APS
    
    Indenture dated as
of January 15, 1998
between APS and The
Bank of New York
Mellon Trust
Company N.A.
(successor to
JPMorgan Chase
Bank, N.A.,
formerly known as
The Chase Manhattan
Bank), as Trustee
    
    4.10 to APS Registration Statement Nos.
333-15379 and 333-27551 by means of
January 13, 1998 Form 8-K Report, File
No. 1-4473
    
    1-16-984.6a
    
    Pinnacle West
APS
    
    Fifth Supplemental
Indenture dated as
of October 1, 2001
    
    4.1 to APS September 30, 2001 Form
10-Q, File No. 1-4473
    
    11-6-014.6b
    
    Pinnacle West
APS
    
    Sixth Supplemental
Indenture dated as
of March 1, 2002
    
    4.1 to APS Registration Statement Nos.
333-63994 and 333-83398 by means of
February 26, 2002 Form 8-K Report, File
No. 1-4473
    
    2-28-024.6c
    
    Pinnacle West
APS
    
    Seventh
Supplemental
Indenture dated as
of May 1, 2003
    
    4.1 to APS Registration Statement No.
333-90824 by means of May 7, 2003 Form
8-K Report, File No. 1-4473
    
    5-9-03
 171




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed4.6d
    
    Pinnacle West
APS
    
    Eighth Supplemental
Indenture dated as
of June 15, 2004
    
    4.1 to APS Registration Statement No.
333-106772 by means of June 24, 2004
Form 8-K Report, File No. 1-4473
    
    6-28-044.6e
    
    Pinnacle West
APS
    
    Ninth Supplemental
Indenture dated as
of August 15, 2005
    
    4.1 to APS Registration Statements Nos.
333-106772 and 333-121512 by means of
August 17, 2005 Form 8-K Report, File
No. 1-4473
    
    8-22-054.6f
    
    APS
    
    Tenth Supplemental
Indenture dated as
of August 1, 2006
    
    4.1 to APS July 31, 2006 Form 8-K
Report, File No. 1-4473
    
    8-2-064.7
    
    Pinnacle West
    
    Amended and
Restated Rights
Agreement, dated as
of March 26, 1999,
between Pinnacle
West Capital
Corporation and
BankBoston, N.A.,
as Rights Agent,
including (i) as
Exhibit A thereto
the form of Amended
Certificate of
Designation of
Series A
Participating
Preferred Stock of
Pinnacle West
Capital
Corporation, (ii)
as Exhibit B
thereto the form of
Rights Certificate
and (iii) as
Exhibit C thereto
the Summary of
Right to Purchase
Preferred Shares
    
    4.1 to Pinnacle Wests March 22, 1999
Form 8-K Report, File No. 1-8962
    
    4-19-994.7a
    
    Pinnacle West
    
    Amendment to Rights
Agreement,
effective as of
January 1, 2002
    
    4.1 to Pinnacle Wests March 31, 2002
Form 10-Q Report, File No. 1-8962
    
    5-15-02
 172




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed4.8
    
    Pinnacle West
    
    Second Amended and
Restated Investors
Advantage Plan
dated as of June
23, 2004
    
    4.4 to Pinnacle Wests June 23, 2004
Form 8-K Report, File No. 1-8962
    
    8-9-044.8a
    
    Pinnacle West
    
    Third Amended and
Restated Investors
Advantage Plan
dated as of
November 25, 2008
    
    4.1 to Pinnacle Wests Form S-3
Registration Statement No. 333-155641
    
    11-25-084.9
    
    Pinnacle West
    
    Agreement, dated
March 29, 1988,
relating to the
filing of
instruments
defining the rights
of holders of
long-term debt not
in excess of 10% of
the Companys total
assets
    
    4.1 to Pinnacle Wests 1987 Form 10-K
Report, File No. 1-8962
    
    3-30-884.9a
    
    Pinnacle West
APS
    
    Agreement, dated
March 21, 1994,
relating to the
filing of
instruments
defining the
rights of holders
of APS long-term
debt not in excess
of 10% of APS
total assets
    
    4.1 to APS 1993 Form 10-K Report, File
No. 1-4473
    
    3-30-9410.1.1
    
    Pinnacle West
APS
    
    Two separate
Decommissioning
Trust Agreements
(relating to PVNGS
Units 1 and 3,
respectively), each
dated July 1, 1991,
between APS and
Mellon Bank, N.A.,
as Decommissioning
Trustee
    
    10.2 to APS September 30, 1991 Form
10-Q Report, File No. 1-4473
    
    11-14-91
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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.1.1a
    
    Pinnacle West
APS
    
    Amendment No. 1 to
Decommissioning
Trust Agreement
(PVNGS Unit 1),
dated as of
December 1, 1994
    
    10.1 to APS 1994 Form
10- K Report, File No. 1-4473
    
    3-30-9510.1.1b
    
    Pinnacle West
APS
    
    Amendment No. 1 to
Decommissioning
Trust Agreement
(PVNGS Unit 3),
dated as of
December 1, 1994
    
    10.2 to APS 1994 Form
10-K Report, File No. 1-4473
    
    3-30-9510.1.1c
    
    Pinnacle West
APS
    
    Amendment No. 2 to
APS Decommissioning
Trust Agreement
(PVNGS Unit 1)
dated as of July 1,
1991
    
    10.4 to APS 1996 Form
10-K Report , File No. 1-4473
    
    3-28-9710.1.1d
    
    Pinnacle West
APS
    
    Amendment No. 2 to
APS Decommissioning
Trust Agreement
(PVNGS Unit 3)
dated as of July 1,
1991
    
    10.6 to APS 1996 Form
10-K Report, File No. 1-4473
    
    3-28-9710.1.1e
    
    Pinnacle West
APS
    
    Amendment No. 3 to
the Decommissioning
Trust Agreement
(PVNGS Unit 1),
dated as of March
18, 2002
    
    10.2 to Pinnacle Wests March 31, 2002
Form 10-Q Report, File No. 1-8962
    
    5-15-0210.1.1f
    
    Pinnacle West
APS
    
    Amendment No. 3 to
the Decommissioning
Trust Agreement
(PVNGS Unit 3),
dated as of March
18, 2002
    
    10.4 to Pinnacle Wests March 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-0210.1.1g
    
    Pinnacle West
APS
    
    Amendment No. 4 to
the Decommissioning
Trust Agreement
(PVNGS Unit 1),
dated as of
December 19, 2003
    
    10.3 to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-04
 174




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.1.1h
    
    Pinnacle West
APS
    
    Amendment No. 4 to
the Decommissioning
Trust Agreement
(PVNGS Unit 3),
dated as of
December 19, 2003
    
    10.5 to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.1.1i
    
    Pinnacle West
APS
    
    Amendment No. 5 to
the Decommissioning
Trust Agreement
(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
    
    5-9-0710.1.1j
    
    Pinnacle West
APS
    
    Amendment No. 5 to
the Decommissioning
Trust Agreement
(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
    
    5-9-0710.1.2
    
    Pinnacle West
APS
    
    Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2)
dated as of January
31, 1992, among
APS, Mellon Bank,
N.A., as
Decommissioning
Trustee, and State
Street Bank and
Trust Company, as
successor to The
First National
Bank of Boston, as
Owner Trustee under
two separate Trust
Agreements, each
with a separate
Equity Participant,
and as Lessor under
two separate
Facility Leases,
each relating to an
undivided interest
in PVNGS Unit 2
    
    10.1 to Pinnacle Wests 1991 Form 10-K
Report, File No. 1-8962
    
    3-26-92
 175




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.1.2a
    
    Pinnacle West
APS
    
    First Amendment to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of
November 1, 1992
    
    10.2 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9310.1.2b
    
    Pinnacle West
APS
    
    Amendment No. 2 to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of
November 1, 1994
    
    10.3 to APS 1994 Form
10-K Report, File No. 1-4473
    
    3-30-9510.1.2c
    
    Pinnacle West
APS
    
    Amendment No. 3 to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of June
20, 1996
    
    10.1 to APS June 30, 1996 Form 10-Q
Report, File No. 1-4473
    
    8-9-9610.1.2d
    
    Pinnacle West
APS
    
    Amendment No. 4 to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2)
dated as of
December 16, 1996
    
    APS 10.5 to APS 1996 Form 10-K Report,
File No. 1-4473
    
    3-28-9710.1.2e
    
    Pinnacle West
APS
    
    Amendment No. 5 to
the Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of June
30, 2000
    
    10.1 to Pinnacle Wests March 31, 2002
Form 10-Q Report, File No. 1-8962
    
    5-15-0210.1.2f
    
    Pinnacle West
APS
    
    Amendment No. 6 to
the Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of March
18, 2002
    
    10.3 to Pinnacle Wests March 31, 2002
Form 10-Q Report, File No. 1-8962
    
    5-15-02
 176




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.1.2g
    
    Pinnacle West
APS
    
    Amendment No. 7 to
the Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of
December 19, 2003
    
    10.4 to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.1.2h
    
    Pinnacle West
APS
    
    Amendment No. 8 to
the Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of April
1, 2007
    
    10.1.2h to Pinnacle Wests 2007 Form
10-K Report, File No. 1-8962
    
    2-27-0810.2.1b
    
    Pinnacle West
APS
    
    Arizona Public
Service Company
Deferred
Compensation Plan,
as restated,
effective January
1, 1984, and the
second and third
amendments thereto,
dated December 22,
1986, and December
23, 1987
respectively
    
    10.4 to APS 1988 Form
10-K Report, File No. 1-4473
    
    3-8-8910.2.1ab
    
    Pinnacle West
APS
    
    Third Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan,
effective as of
January 1, 1993
    
    10.3A to APS 1993 Form
10-K Report, File No. 1-4473
    
    3-30-9410.2.1bb
    
    Pinnacle West
APS
    
    Fourth Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan
effective as of May
1, 1993
    
    10.2 to APS September 30, 1994 Form
10-Q Report, File No. 1-4473
    
    11-10-94
 177




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.2.1cb
    
    Pinnacle West
APS
    
    Fifth Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan
effective January
1, 1997
    
    10.3A to APS 1996 Form 10-K Report,
File No. 1-4473
    
    3-28-9710.2.1db
    
    Pinnacle West
APS
    
    Sixth Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan
effective January
1, 2001
    
    10.8A to Pinnacle Wests 2000 Form 10-K
Report, File No. 1-8962
    
    3-14-0110.2.2b
    
    Pinnacle West
APS
    
    Directors Deferred
Compensation Plan,
as restated,
effective January
1, 1986
    
    10.1 to APS June 30, 1986 Form 10-Q
Report, File No. 1-4473
    
    8-13-8610.2.2ab
    
    Pinnacle West
APS
    
    Second Amendment to
the Arizona Public
Service Company
Directors Deferred
Compensation Plan,
effective as of
January 1, 1993
    
    10.2A to APS 1993 Form
10-K Report, File No. 1-4473
    
    3-30-9410.2.2bb
    
    Pinnacle West
APS
    
    Third Amendment to
the Arizona Public
Service Company
Directors Deferred
Compensation Plan,
effective as of May
1, 1993
    
    10.1 to APS September 30, 1994 Form
10-Q Report, File No. 1-4473
    
    11-10-9410.2.2cb
    
    Pinnacle West
APS
    
    Fourth Amendment to
the Arizona Public
Service Company
Directors Deferred
Compensation Plan,
effective as of
January 1, 1999
    
    10.8A to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-00
 178




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.2.3b
    
    Pinnacle West
APS
    
    Trust for the
Pinnacle West
Capital
Corporation,
Arizona Public
Service Company and
SunCor Development
Company Deferred
Compensation Plans
dated August 1,
1996
    
    10.14A to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.2.3ab
    
    Pinnacle West
APS
    
    First Amendment
dated December 7,
1999 to the Trust
for the Pinnacle
West Capital
Corporation,
Arizona Public
Service Company and
SunCor Development
Company Deferred
Compensation Plans
    
    10.15A to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.2.4b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan
as amended and
restated effective
January 1, 1996
    
    10.10A to APS 1995 Form 10-K Report,
File No. 1-4473
    
    3-29-9610.2.4ab
    
    Pinnacle West
APS
    
    First Amendment
effective as of
January 1, 1999, to
the Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan
    
    10.7A to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-00
 179




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.2.4bb
    
    Pinnacle West
APS
    
    Second Amendment
effective January
1, 2000 to the
Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan
    
    10.10A to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.2.4cb
    
    Pinnacle West
APS
    
    Third Amendment to
the Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan,
effective as of
January 1, 2002
    
    10.3 to Pinnacle Wests March 31, 2003
Form 10-Q Report, File No. 1-8962
    
    5-15-0310.2.4db
    
    Pinnacle West
APS
    
    Fourth Amendment to
the Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan,
effective January
1, 2003
    
    10.64 to Pinnacle West/APS 2005 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-13-0610.2.5b
    
    Pinnacle West
APS
    
    Schedules of
William J. Post and
Jack E. Davis to
Arizona Public
Service Company
Deferred
Compensation Plan,
as amended
    
    10.3A to Pinnacle West 2002 Form 10-K
Report, File No. 1-8962
    
    3-31-03
 180




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.2.6b
    
    Pinnacle West
APS
    
    Deferred
Compensation Plan
of 2005 for
Employees of
Pinnacle West
Capital Corporation
and Affiliates10.3.1b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
Supplement Excess
Benefit Retirement
Plan, amended and
restated as of
January 1, 2003
    
    10.7A to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.3.1ab
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
Supplemental Excess
Benefit Retirement
Plan, as amended
and restated, dated
December 18, 2003
    
    10.48b to Pinnacle West/APS 2005 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-13-0610.3.2b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
Supplemental Excess
Benefit Retirement
Plan of 200510.4.1b
    
    Pinnacle West
APS
    
    Letter Agreement
dated December 21,
1993, between APS
and William L.
Stewart
    
    10.6A to APS 1994 Form 10-K Report,
File No. 1-4473
    
    3-30-9510.4.2b
    
    Pinnacle West
APS
    
    Letter Agreement
dated August 16,
1996 between APS
and William L.
Stewart
    
    10.8 to APS 1996 Form
10-K Report, File No. 1-4473
    
    3-28-9710.4.3b
    
    Pinnacle West
APS
    
    Letter Agreement
dated October 3,
1997 between APS
and William L.
Stewart
    
    10.2 to APS September 30, 1997 Form
10-Q Report, File No. 1-4473
    
    11-12-97
 181




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.4.4b
    
    Pinnacle West
APS
    
    Letter Agreement
dated December 13,
1999 between APS
and William L.
Stewart
    
    10.9A to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.4.4ab
    
    Pinnacle West
APS
    
    Amendment to Letter
Agreement,
effective as of
January 1, 2002,
between APS and
William L. Stewart
    
    10.1 to Pinnacle Wests June 30, 2002
Form 10-Q Report, File No. 1-8962
    
    8-13-0210.4.5b
    
    Pinnacle West
APS
    
    Letter Agreement
dated June 28, 2001
between Pinnacle
West Capital
Corporation and
Steve Wheeler
    
    10.4A to Pinnacle Wests 2002 Form 10-K
Report, File No. 1-8962
    
    3-31-0310.4.6b
    
    APS
    
    Letter Agreement
dated December 20,
2006 between APS
and Randall K.
Edington
    
    10.78 to Pinnacle West/APS 2006 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    2-28-0710.4.7b
    
    APS
    
    Letter Agreement
dated July 22, 2008
between APS and
Randall K. Edington
    
    10.3 to Pinnacle West/APS June 30, 2008
Form 10-Q Report, File No. 1-4473
    
    8-07-0810.4.8b
    
    Pinnacle West
APS
    
    Letter Agreement
dated June 17, 2008
between Pinnacle West/APS and James
R. Hatfield
    
    10.1 to Pinnacle West/APS June 30, 2008
Form 10-Q Report, File Nos. 1-8962 and
1-4473
    
    8-07-0810.4.9b
    
    APS
    
    Description of 2008
Palo Verde Specific
Compensation
Opportunity for
Randall K. Edington
    
    10.7 to Pinnacle West/APS June 30, 2008
Form 10-Q Report, File No. 1-4473
    
    8-07-0810.4.10b
    
    APS
    
    Supplemental
Agreement dated
December 26, 2008 between
APS and Randall K.
Edington
 182




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.5.1bd
    
    Pinnacle West
APS
    
    Key Executive
Employment and
Severance Agreement
between Pinnacle
West and certain
executive officers
of Pinnacle West
and its
subsidiaries
    
    10.77 to Pinnacle West/APS 2005 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-13-0610.5.1abd
    
    Pinnacle West
APS
    
    Form of Amended and
Restated Key
Executive
Employment and
Severance Agreement
between Pinnacle
West and certain
officers of
Pinnacle West and
its subsidiaries
    
    10.4 to Pinnacle West/APS September 30,
2007 Form 10-Q Report, File Nos. 1-8962
and 1-4473
    
    11-5-0710.5.2bd
    
    Pinnacle West
APS
    
    Form of Key
Executive
Employment and
Severance Agreement
between Pinnacle
West and certain
officers of
Pinnacle West and
its subsidiaries
    
    10.3 to Pinnacle West/APS September 30,
2007 Form 10-Q Report, File Nos. 1-8962
and 1-4473
    
    11-5-0710.6.1b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
1994 Long-Term
Incentive Plan,
effective as of
March 23, 1994
    
    Appendix A to the Proxy Statement for
the Plan Report for Pinnacle Wests 1994
Annual Meeting of Shareholders, File
No. 1-8962
    
    4-15-9410.6.1ab
    
    Pinnacle West
APS
    
    First Amendment
dated December 7,
1999 to the
Pinnacle West
Capital Corporation
1994 Long-Term
Incentive Plan
    
    10.12A to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.6.2b
    
    Pinnacle WestAPS
    
    Pinnacle West Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.5A to Pinnacle Wests 2002 Form 10-K Report
    
    3-31-03
 183




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.6.2abd
    
    Pinnacle West
APS
    
    Performance Share
Agreement under the
Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.1 to Pinnacle West/APS December 9,
2005 Form 8-K Report, File Nos. 1-8962
and 1-4473
    
    12-15-0510.6.2bbd
    
    Pinnacle West
APS
    
    Performance Share
Agreement under the
Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.1 to Pinnacle West/APS December 31,
2005 Form
8-K Report, File Nos. 1-8962 and 1-4473
    
    2-1-0610.6.2cd
    
    Pinnacle West
APS
    
    Performance
Accelerated Stock
Option Agreement
under Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.98 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.6.2dbd
    
    Pinnacle West
APS
    
    Stock Ownership
Incentive Agreement
under Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.99 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.6.2ebd
    
    Pinnacle West
APS
    
    Performance Share
Agreement under the
Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.91 to Pinnacle West/APS 2005 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-13-0610.6.3b
    
    Pinnacle West
    
    Pinnacle West
Capital Corporation
2000 Director
Equity Plan
    
    99.1 to Pinnacle Wests Registration
Statement on Form S-8 (No. 333-40796),
File No. 1-8962)
    
    7-3-0010.6.4b
    
    Pinnacle West
    
    Pinnacle West
Capital Corporation
2007 Long-Term
Incentive Plan
    
    Appendix B to the Proxy Statement for
Pinnacle Wests 2007 Annual Meeting of
Shareholders, File No. 1-8962
    
    4-20-07
 184




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.6.4ab
    
    Pinnacle West
    
    First Amendment to
the Pinnacle West
Capital Corporation
2007 Long-Term
Incentive Plan
    
    10.2 to Pinnacle West/APS April 18, 2007
Form 8-K Report, File No. 1-8962
    
    4-20-0710.6.4bb
    
    Pinnacle West
    
    Description of
Annual Stock Grants
to Non-Employee
Directors
    
    10.1 to Pinnacle West/APS September 30,
2007 Form 10-Q Report, File No. 1-8962
    
    11-5-0710.6.4cb
    
    Pinnacle West
    
    Description of
Stock Grant to W.
Douglas Parker
    
    10.2 to Pinnacle West/APS September 30,
2007 Form 10-Q Report, File No. 1-8962
    
    11-5-0710.6.4db
    
    Pinnacle West
    
    Description of
Annual Stock Grants
to Non-Employee
Directors
    
    10.2 to Pinnacle West/APS June 30, 2008
Form 10-Q Report, File No. 1-8962
    
    8-07-0810.6.5bd
    
    Pinnacle West
APS
    
    Summary of 2009 CEO
Variable Incentive
Plan and Officer
Variable Incentive
Plan10.7.1
    
    Pinnacle West
APS
    
    Indenture of Lease
with Navajo Tribe
of Indians, Four
Corners Plant
    
    5.01 to APS Form S-7 Registration
Statement, File No. 2-59644
    
    9-1-7710.7.1a
    
    Pinnacle West
APS
    
    Supplemental and
Additional
Indenture of Lease,
including
amendments and
supplements to
original lease with
Navajo Tribe of
Indians, Four
Corners Plant
    
    5.02 to APS Form S-7 Registration
Statement, File No. 2-59644
    
    9-1-7710.7.1b
    
    Pinnacle West
APS
    
    Amendment and
Supplement No. 1 to
Supplemental and Additional
Indenture of Lease
Four Corners, dated
April 25, 1985
    
    10.36 to Pinnacle Wests Registration
Statement on Form 8-B Report, File No.
1-8962
    
    7-25-85
 185




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.7.2
    
    Pinnacle West
APS
    
    Application and
Grant of
multi-party
rights-of-way and
easements, Four
Corners Plant Site
    
    5.04 to APS Form S-7 Registration
Statement, File No. 2-59644
    
    9-1-7710.7.2a
    
    Pinnacle West
APS
    
    Application and
Amendment No. 1 to
Grant of
multi-party
rights-of-way and
easements, Four
Corners Power Plant
Site dated April
25, 1985
    
    10.37 to Pinnacle Wests Registration
Statement on Form 8-B, File No. 1-8962
    
    7-25-8510.7.3
    
    Pinnacle West
APS
    
    Application and
Grant of Arizona
Public Service
Company rights-
of-way and
easements, Four
Corners Plant Site
    
    5.05 to APS Form S-7 Registration
Statement, File No. 2-59644
    
    9-1-7710.7.3a
    
    Pinnacle West
APS
    
    Application and
Amendment No. 1 to
Grant of Arizona
Public Service
Company
rights-of-way and
easements, Four
Corners Power Plant
Site dated April
25, 1985
    
    10.38 to Pinnacle Wests Registration
Statement on Form 8-B, File No. 1-8962
    
    7-25-8510.7.4
    
    Pinnacle West
APS
    
    Four Corners
Project Co-Tenancy
Agreement Amendment
No. 6
    
    10.7 to Pinnacle Wests 2000 Form 10-K
Report, File No. 1-8962
    
    3-14-0110.8.1
    
    Pinnacle West
APS
    
    Indenture of Lease,
Navajo Units 1, 2,
and 3
    
    5(g) to APS Form S-7 Registration
Statement, File No. 2-36505
    
    3-23-7010.8.2
    
    Pinnacle West
APS
    
    Application of
Grant of
rights-of-way and
easements, Navajo
Plant
    
    5(h) to APS Form S-7 Registration
Statement, File No. 2-36505
    
    3-23-70
 186




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.8.3
    
    Pinnacle West
APS
    
    Water Service
Contract Assignment
with the United
States Department
of Interior, Bureau
of Reclamation,
Navajo Plant
    
    5(l) to APS Form S-7 Registration
Statement, File No. 2-394442
    
    3-16-7110.8.4
    
    Pinnacle West
APS
    
    Navajo Project
Co-Tenancy
Agreement dated as
of March 23, 1976,
and Supplement No.
1 thereto dated as
of October 18,
1976, Amendment No.
1 dated as of July
5, 1988, and
Amendment No. 2
dated as of June
14, 1996; Amendment
No. 3 dated as of
February 11, 1997;
Amendment No. 4
dated as of January
21, 1997; Amendment
No. 5 dated as of
January 23, 1998;
Amendment No. 6
dated as of July
31, 1998
    
    10.107 to Pinnacle West/APS 2005 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-13-0610.8.5
    
    Pinnacle West
APS
    
    Navajo Project
Participation
Agreement dated as
of September 30,
1969, and Amendment
and Supplement No.
1 dated as of
January 16, 1970,
and Coordinating
Committee Agreement
No. 1 dated as of
September 30, 1971
    
    10.108 to Pinnacle West/APS 2005 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-13-06
 187




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.9.1
    
    Pinnacle West
APS
    
    Arizona Nuclear
Power Project
Participation
Agreement, dated
August 23, 1973,
among APS Salt
River Project
Agricultural
Improvement and
Power District,
Southern California
Edison Company,
Public Service
Company of New
Mexico, El Paso
Electric Company,
Southern California
Public Power
Authority, and
Department of Water
and Power of the
City of Los
Angeles, and
amendments 1-12
thereto
    
    10. 1 to APS 1988 Form
10-K Report, File No. 1-4473
    
    3-8-8910.9.1a
    
    Pinnacle West
APS
    
    Amendment No. 13,
dated as of April
22, 1991, to
Arizona Nuclear
Power Project
Participation
Agreement, dated
August 23, 1973,
among APS, Salt
River Project
Agricultural
Improvement and
Power District,
Southern California
Edison Company,
Public Service
Company of New
Mexico, El Paso
Electric Company,
Southern California
Public Power
Authority, and
Department of Water
and Power of the
City of Los Angeles
    
    10.1 to APS March 31, 1991 Form 10-Q
Report, File No. 1-4473
    
    5-15-91
 188




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.9.1b
    
    Pinnacle West
APS
    
    Amendment No. 14 to
Arizona Nuclear
Power Project
Participation
Agreement, dated
August 23, 1973,
among APS, Salt
River Project
Agricultural
Improvement and
Power District,
Southern California
Edison Company,
Public Service
Company of New
Mexico, El Paso
Electric Company,
Southern California
Public Power
Authority, and
Department of Water
and Power of the
City of Los Angeles
    
    99.1 to Pinnacle Wests June 30, 2000
Form 10-Q Report, File No. 1-8962
    
    8-14-0010.10.1
    
    Pinnacle West
APS
    
    Asset Purchase and
Power Exchange
Agreement dated
September 21, 1990
between APS and
PacifiCorp, as
amended as of
October 11, 1990
and as of July 18,
1991
    
    10.1 to APS June 30, 1991 Form 10-Q
Report, File No. 1-4473
    
    8-8-9110.10.2
    
    Pinnacle West
APS
    
    Long-Term Power
Transaction
Agreement dated
September 21, 1990
between APS and
PacifiCorp, as
amended as of
October 11, 1990,
and as of July 8,
1991
    
    10.2 to APS June 30, 1991 Form 10-Q
Report, File No. 1-4473
    
    8-8-91
 189




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.10.2a
    
    Pinnacle West
APS
    
    Amendment No. 1
dated April 5, 1995
to the Long-Term
Power Transaction
Agreement and Asset
Purchase and Power
Exchange Agreement
between PacifiCorp
and APS
    
    10.3 to APS 1995 Form 10-K Report, File
No. 1-4473
    
    3-29-9610.10.3
    
    Pinnacle West
APS
    
    Restated
Transmission
Agreement between
PacifiCorp and APS
dated April 5, 1995
    
    10.4 to APS 1995 Form
10-K Report, File No. 1-4473
    
    3-29-9610.10.4
    
    Pinnacle West
APS
    
    Contract among
PacifiCorp, APS and
United States
Department of
Energy Western Area
Power
Administration,
Salt Lake Area
Integrated Projects
for Firm
Transmission
Service dated May
5, 1995
    
    10.5 to APS 1995 Form
10-K Report, File No. 1-4473
    
    3-29-9610.10.5
    
    Pinnacle West
APS
    
    Reciprocal
Transmission
Service Agreement
between APS and
PacifiCorp dated as
of March 2, 1994
    
    10.6 to APS 1995 Form
10-K Report, File No. 1-4473
    
    3-29-9610.11.1
    
    Pinnacle West
APS
    
    Amended and
Restated
Reimbursement
Agreement among
APS, the Banks
party thereto, and
JPMorgan Chase
Bank, as
Administrative
Agent and Issuing
Bank, dated as of
July 22, 2002
    
    10.100 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-05
 190




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.11.2
    
    Pinnacle West
APS
    
    Three-Year Credit
Agreement dated as
of May 21, 2004
between APS as
Borrower, and the
banks, financial
institutions and
other institutional
lenders and initial
issuing banks
listed on the
signature pages
thereof
    
    10.101 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.11.3
    
    Pinnacle West
APS
    
    Amended and
Restated Five-Year
Credit Agreement
dated as of
December 9, 2005
between APS, as
Borrower, Citibank,
N.A., as Agent, and
the lenders and
other parties
thereto
    
    10.95 to Pinnacle West/APS 2005 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-13-0610.11.4
    
    Pinnacle West
    
    $200,000,000 Senior
Notes Uncommitted
Master Shelf
Agreement dated as
of February 28,
2006
    
    10.96 to Pinnacle West 2005 Form 10-K
Report, File No. 1-8962
    
    3-13-0610.11.5
    
    Pinnacle West
    
    Amended and
Restated Credit
Agreement dated as
of December 9, 2005
among Pinnacle West
Capital
Corporation, as
Borrower, JPMorgan
Chase Bank, N.A.,
as Agent, and the
other agent parties
thereto
    
    10.97 to Pinnacle West 2005 Form 10-K
Report, File No. 1-8962
    
    3-13-06
 191




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.11.5a
    
    Pinnacle West
    
    First Amendment to
Amended and
Restated Credit
Agreement, dated as
of May 15, 2006,
supplementing and
amending the
Amended and
Restated Credit
Agreement, dated as
of December 9,
2005, among
Pinnacle West
Capital
Corporation, as
Borrower, JPMorgan
Chase Bank, N.A. as
Agent and the other
parties thereto
    
    10.1 to Pinnacle Wests June 30, 2006
Form 10-Q Report, File No. 1-8962
    
    8-8-0610.11.6
    
    Pinnacle West
APS
    
    Credit Agreement
dated as of October
19, 2004 among
Pinnacle West,
other lenders, and
JPMorgan Chase
Bank, as
Administrative
Agent
    
    10.1 to Pinnacle Wests September 30,
2004 Form 10-Q Report, File No. 1-8962
    
    11-8-0410.11.7
    
    APS
    
    $500,000,000
Five-Year Credit
Agreement dated as
of September 28,
2006 among Arizona
Public Service
Company as
Borrower, Bank of
America, N.A. as
Administrative
Agent and Issuing
Bank, The Bank of
New York as
Syndication Agent
and Issuing Bank
and the other
parties thereto
    
    10.1 to APS September 2006 Form 10-Q
Report, File No. 1-4473
    
    11-8-06
 192




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.11.8
    
    Pinnacle West
APS
    
    Amended and
Restated
Reimbursement
Agreement among
Arizona Public
Service Company,
The Banks party
thereto and
JPMorgan Chase
Bank, N.A., as
Administrative
Agent and Issuing
Bank, and Barclays
Bank PLC, as
Syndication Agent,
dated as of May 19,
2005
    
    99.6 to PinnacleWest/APS June 30, 2005
Form 10-Q Report, File Nos. 1-8962 and
1-4473
    
    8-9-0510.12.1c
    
    Pinnacle West
APS
    
    Facility Lease,
dated as of August
1, 1986, between
U.S. Bank National
Association,
successor to State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, in its
capacity as Owner
Trustee, as Lessor,
and APS, as Lessee
    
    4.3 to APS Form S-3 Registration
Statement, File No. 33-9480
    
    10-24-8610.12.1ac
    
    Pinnacle West
APS
    
    Amendment No. 1,
dated as of
November 1, 1986,
to Facility Lease,
dated as of August
1, 1986, between
U.S. Bank National
Association,
successor to State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, in its
capacity as Owner
Trustee, as Lessor,
and APS, as Lessee
    
    10.5 to APS September 30, 1986 Form
10-Q Report by means of Amendment No. 1
on December 3, 1986 Form 8, File No.
1-4473
    
    12-4-86
 193




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.12.1bc
    
    Pinnacle West
APS
    
    Amendment No. 2
dated as of June 1,
1987 to Facility
Lease dated as of
August 1, 1986
between U.S. Bank
National
Association,
successor to State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as
Lessor, and APS, as
Lessee
    
    10.3 to APS 1988 Form
10-K Report, File No. 1-4473
    
    3-8-8910.12.1cc
    
    Pinnacle West
APS
    
    Amendment No. 3,
dated as of March
17, 1993, to
Facility Lease,
dated as of August
1, 1986, between
U.S. Bank National
Association,
successor to State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as
Lessor, and APS, as
Lessee
    
    10.3 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9310.12.2
    
    Pinnacle West
APS
    
    Facility Lease,
dated as of
December 15, 1986,
between U.S. Bank
National
Association,
successor to State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, in its
capacity as Owner
Trustee, as Lessor,
and APS, as Lessee
    
    10.1 to APS November 18, 1986 Form 8-K
Report, File No. 1-4473
    
    1-20-87
 194




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.12.2a
    
    Pinnacle West
APS
    
    Amendment No. 1,
dated as of August
1, 1987, to
Facility Lease,
dated as of
December 15, 1986,
between U.S. Bank
National
Association,
successor to State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as
Lessor, and APS, as
Lessee
    
    4.13 to APS Form S-3 Registration
Statement No. 33-9480 by means of
August 1, 1987 Form 8-K Report, File No.
1-4473
    
    8-24-8710.12.2b
    
    Pinnacle West
APS
    
    Amendment No. 2,
dated as of March
17, 1993, to
Facility Lease,
dated as of
December 15, 1986,
between U.S. Bank
National
Association,
successor to State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as
Lessor, and APS, as
Lessee
    
    10.4 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9310.13.1
    
    Pinnacle West
APS
    
    Agreement No. 13904
(Option and
Purchase of
Effluent) with
Cities of Phoenix,
Glendale, Mesa,
Scottsdale, Tempe,
Town of Youngtown,
and Salt River
Project
Agricultural
Improvement and
Power District,
dated April 23,
1973
    
    10.3 to APS 1991 Form
10-K Report, File No. 1-4473
    
    3-19-92
 195




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.13.2
    
    Pinnacle West
APS
    
    Agreement between
Pinnacle West
Energy Corporation
and Arizona Public
Service Company for
Transportation and
Treatment of
Effluent by and
between Pinnacle
West Energy
Corporation and APS
dated as of the
10th day
of April, 2001
    
    10.102 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.13.3
    
    Pinnacle West
APS
    
    Agreement for the
Transfer and Use of
Wastewater and
Effluent by and
between APS, SRP
and PWE dated June
1, 2001
    
    10.103 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.13.4
    
    Pinnacle West
APS
    
    Agreement for the
Sale and Purchase
of Wastewater
Effluent dated
November 13, 2000,
by and between the
City of Tolleson,
Arizona, APS and
SRP
    
    10.104 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.13.5
    
    Pinnacle West
APS
    
    Operating Agreement
for the
Co-Ownership of
Wastewater Effluent
dated November 16,
2000 by and between
APS and SRP
    
    10.105 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-05
 196




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.13.6
    
    Pinnacle West
APS
    
    Agreement for the
Sale and Purchase
of Wastewater
Effluent with City
of Tolleson and
Salt River
Agricultural
Improvement and
Power District,
dated June 12,
1981, including
Amendment No. 1
dated as of
November 12, 1981
and Amendment No. 2
dated as of June 4,
1986
    
    10.4 to APS 1991 Form 10-K Report, File
1-4473
    
    3-19-9210.14.1
    
    Pinnacle West
APS
    
    Contract, dated
July 21, 1984, with
DOE providing for
the disposal of
nuclear fuel and/or
high-level
radioactive waste,
ANPP
    
    10.31 to Pinnacle Wests Form S-14
Registration Statement, File No. 2-96386
    
    3-13-8510.15.1
    
    Pinnacle West
APS
    
    Territorial
Agreement between
APS and Salt River
Project
    
    10.1 to APS March 31, 1998 Form 10-Q
Report, File No. 1-4473
    
    5-15-9810.15.2
    
    Pinnacle West
APS
    
    Power Coordination
Agreement between
APS and Salt River
Project
    
    10.2 to APS March 31, 1998 Form 10-Q
Report, File No. 1-4473
    
    5-15-9810.15.3
    
    Pinnacle West
APS
    
    Memorandum of
Agreement between
APS and Salt River
Project
    
    10.3 to APS March 31, 1998 Form 10-Q
Report, File No. 1-4473
    
    5-15-9810.15.3a
    
    Pinnacle West
APS
    
    Addendum to
Memorandum of
Agreement between
APS and Salt River
Project dated as of
May 19, 1998
    
    10.2 to APS May 19, 1998 Form 8-K
Report, File No. 1-4473
    
    6-26-9812.1
    
    Pinnacle West
    
    Ratio of Earnings
to Fixed Charges
 197




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed12.2
    
    APS
    
    Ratio of Earnings
to Fixed Charges12.3
    
    Pinnacle West
    
    Ratio of Earnings
to Combined Fixed
Charges and
Preferred Stock
Dividend
Requirements21.1
    
    Pinnacle West
    
    Subsidiaries of
Pinnacle West23.1
    
    Pinnacle West
    
    Consent of Deloitte
& Touche LLP23.2
    
    APS
    
    Consent of Deloitte
& Touche LLP31.1
    
    Pinnacle West
    
    Certificate of
William J. Post,
Chief Executive
Officer, pursuant
to Rule 13a-14(a)
and Rule 15d-14(a)
of the Securities
Exchange Act, as
amended31.2
    
    Pinnacle West
    
    Certificate of
James R. Hatfield,
Chief Financial
Officer, pursuant
to Rule 13a-14(a)
and Rule 15d-14(a)
of the Securities
Exchange Act, as
amended31.3
    
    APS
    
    Certificate of
Donald E. Brandt,
Chief Executive
Officer, pursuant
to Rule 13a-14(a)
and Rule 15d-14(a)
of the Securities
Exchange Act, as
amended
 198




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed31.4
    
    APS
    
    Certificate of
James R. Hatfield,
Chief Financial
Officer, pursuant
to Rule 13a-14(a)
and Rule 15d-14(a)
of the Securities
Exchange Act, as
amended32.1
    
    Pinnacle West
    
    Certification of
Chief Executive
Officer and Chief
Financial Officer,
pursuant to 18
U.S.C. Section
1850, as adopted
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 200232.2
    
    APS
    
    Certification of
Chief Executive
Officer and Chief
Financial Officer,
pursuant to 18
U.S.C. Section
1850, as adopted
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 200299.1
    
    Pinnacle West
APS
    
    Collateral Trust
Indenture among
PVNGS II Funding
Corp., Inc., APS
and Chemical Bank,
as Trustee
    
    4.2 to APS 1992 Form 10-K Report, File
No. 1-4473
    
    3-30-9399.1a
    
    Pinnacle West
APS
    
    Supplemental
Indenture to
Collateral Trust
Indenture among
PVNGS II Funding
Corp., Inc., APS
and Chemical Bank,
as Trustee
    
    4.3 to APS 1992 Form 10-K Report, File
No. 1-4473
    
    3-30-93
 199




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.2c
    
    Pinnacle West
    
    Participation
    
    28.1 to APS September 30, 1992 Form
    
    11-9-92APS
    
    Agreement, dated as
of August 1, 1986,
among PVNGS Funding
Corp., Inc., Bank
of America National
Trust and Savings
Association, State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, in its
individual capacity
and as Owner
Trustee, Chemical
Bank, in its
individual capacity
and as Indenture
Trustee, APS, and
the Equity
Participant named
therein
    
    10-Q Report, File No. 1-447399.2ac
    
    Pinnacle West
APS
    
    Amendment No. 1
dated as of
November 1, 1986,
to Participation
Agreement, dated as
of August 1, 1986,
among PVNGS Funding
Corp., Inc., Bank
of America National
Trust and Savings
Association, State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, in its
individual capacity
and as Owner
Trustee, Chemical
Bank, in its
individual capacity
and as Indenture
Trustee, APS, and
the Equity
Participant named
therein
    
    10.8 to APS September 30, 1986 Form
10-Q Report by means of Amendment No.
1, on December 3, 1986 Form 8, File No.
1-4473
    
    12-4-86
 200




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.2bc
    
    Pinnacle West
APS
    
    Amendment No. 2,
dated as of March
17, 1993, to
Participation
Agreement, dated
as of August 1,
1986, among PVNGS
Funding Corp.,
Inc., PVNGS II
Funding Corp.,
Inc., State Street
Bank and Trust
Company, as
successor to The
First National Bank
of Boston, in its
individual
capacity and as
Owner Trustee,
Chemical Bank, in
its individual
capacity and as
Indenture Trustee,
APS, and the Equity
Participant named
therein
    
    28.4 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9399.3c
    
    Pinnacle West
APS
    
    Trust Indenture,
Mortgage, Security
Agreement and
Assignment of
Facility Lease,
dated as of August
1, 1986, between
State Street Bank
and Trust Company,
as successor to The
First National Bank
of Boston, as Owner
Trustee, and
Chemical Bank, as
Indenture Trustee
    
    4.5 to APS Form S-3 Registration
Statement, File No. 33-9480
    
    10-24-86
 201




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.3ac
    
    Pinnacle West
APS
    
    Supplemental
Indenture No. 1,
dated as of
November 1, 1986 to
Trust Indenture,
Mortgage, Security
Agreement and
Assignment of
Facility Lease,
dated as of August
1, 1986, between
State Street Bank
and Trust Company,
as successor to The
First National Bank
of Boston, as
Owner Trustee, and
Chemical Bank, as
Indenture Trustee
    
    10.6 to APS September 30, 1986 Form
10-Q Report by means of Amendment No. 1
on December 3, 1986 Form 8, File No.
1-4473
    
    12-4-8699.3bc
    
    Pinnacle West
APS
    
    Supplemental
Indenture No. 2 to
Trust Indenture,
Mortgage, Security
Agreement and
Assignment of
Facility Lease,
dated as of August
1, 1986, between
State Street Bank
and Trust Company,
as successor to The
First National Bank
of Boston, as Owner
Trustee, and
Chemical Bank, as
Lease Indenture
Trustee
    
    4.4 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9399.4c
    
    Pinnacle West
APS
    
    Assignment,
Assumption and
Further Agreement,
dated as of August
1, 1986, between
APS and State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as Owner
Trustee
    
    28.3 to APS Form S-3 Registration
Statement, File No. 33-9480
    
    10-24-86
 202




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.4ac
    
    Pinnacle West
APS
    
    Amendment No. 1,
dated as of
November 1, 1986,
to Assignment,
Assumption and
Further Agreement,
dated as of August
1, 1986, between
APS and State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as
Owner Trustee
    
    10.10 to APS September 30, 1986 Form
10-Q Report by means of Amendment No. l
on December 3, 1986 Form 8, File No.
1-4473
    
    12-4-8699.4bc
    
    Pinnacle West
APS
    
    Amendment No. 2,
dated as of March
17, 1993, to
Assignment,
Assumption and
Further Agreement,
dated as of August
1, 1986, between
APS and State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as Owner
Trustee
    
    28.6 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9399.5
    
    Pinnacle West
APS
    
    Participation
Agreement, dated as
of December 15,
1986, among PVNGS
Funding Report
Corp., Inc., State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, in its
individual capacity
and as Owner
Trustee, Chemical
Bank, in its
individual capacity
and as Indenture
Trustee under a
Trust Indenture,
APS, and the Owner
Participant named
therein
    
    28.2 to APS September 30, 1992 Form
10-Q Report, File No. 1-4473
    
    11-9-92
 203




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.5a
    
    Pinnacle West
APS
    
    Amendment No. 1,
dated as of August
1, 1987, to
Participation
Agreement, dated as
of December 15,
1986, among PVNGS
Funding Corp., Inc.
as Funding
Corporation, State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as Owner
Trustee, Chemical
Bank, as Indenture
Trustee, APS, and
the Owner
Participant named
therein
    
    28.20 to APS Form S-3 Registration
Statement No. 33-9480 by means of a
November 6, 1986 Form 8-K Report, File
No. 1-4473
    
    8-10-8799.5b
    
    Pinnacle West
APS
    
    Amendment No. 2,
dated as of March
17, 1993, to
Participation
Agreement, dated as
of December 15,
1986, among PVNGS
Funding Corp.,
Inc., PVNGS II
Funding Corp.,
Inc., State Street
Bank and Trust
Company, as
successor to The
First National Bank
of Boston, in its
individual capacity
and as Owner
Trustee, Chemical
Bank, in its
individual capacity
and as Indenture
Trustee, APS, and
the Owner
Participant named
therein
    
    28.5 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-93
 204




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.6
    
    Pinnacle West
APS
    
    Trust Indenture,
Mortgage Security
Agreement and
Assignment of
Facility Lease,
dated as of
December 15, 1986,
between State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as Owner
Trustee, and
Chemical Bank, as
Indenture Trustee
    
    10.2 to APS November 18, 1986 Form
10-K Report, File No. 1-4473
    
    1-20-8799.6a
    
    Pinnacle West
APS
    
    Supplemental
Indenture No. 1,
dated as of August
1, 1987, to Trust
Indenture,
Mortgage, Security
Agreement and
Assignment of
Facility Lease,
dated as of
December 15, 1986,
between State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as Owner
Trustee, and
Chemical Bank, as
Indenture Trustee
    
    4.13 to APS Form S-3 Registration
Statement No. 33-9480 by means of August
1, 1987 Form 8-K Report, File No. 1-4473
    
    8-24-87
 205




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.6b
    
    Pinnacle West
APS
    
    Supplemental
Indenture No. 2 to
Trust Indenture
Mortgage, Security
Agreement and
Assignment of
Facility Lease,
dated as of
December 15, 1986,
between State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as Owner
Trustee, and
Chemical Bank, as
Lease Indenture
Trustee
    
    4.5 to APS 1992 Form 10-K Report, File
No. 1-4473
    
    3-30-9399.7
    
    Pinnacle West
APS
    
    Assignment,
Assumption and
Further Agreement,
dated as of
December 15, 1986,
between APS and
State Street Bank
and Trust Company,
as successor to The
First National Bank
of Boston, as Owner
Trustee
    
    10.5 to APS November 18, 1986 Form 8-K
Report, File No. 1-4473
    
    1-20-8799.7a
    
    Pinnacle West
APS
    
    Amendment No. 1,
dated as of March
17, 1993, to
Assignment,
Assumption and
Further Agreement,
dated as of
December 15, 1986,
between APS and
State Street Bank
and Trust Company,
as successor to The
First National Bank
of Boston, as Owner
Trustee
    
    28.7 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9399.8c
    
    Pinnacle West
APS
    
    Indemnity Agreement
dated as of March
17, 1993 by APS
    
    28.3 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-93
 206




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.9
    
    Pinnacle West
APS
    
    Extension Letter,
dated as of August
13, 1987, from the
signatories of the
Participation
Agreement to
Chemical Bank
    
    28.20 to APS Form S-3 Registration
Statement No. 33-9480 by means of a
November 6, 1986 Form 8-K Report, File
No. 1-4473
    
    8-10-8799.10
    
    Pinnacle West
APS
    
    Arizona Corporation
Commission Order,
Decision No. 61969,
dated September 29,
1999, including the
Retail Electric
Competition Rules
    
    10.2 to APS September 30, 1999 Form
10-Q Report, File No. 1-4473
    
    11-15-9999.11
    
    Pinnacle West
    
    Purchase Agreement
by and among
Pinnacle West
Energy Corporation
and GenWest, L.L.C.
and Nevada Power
Company, dated June
21, 2005
    
    99.5 to Pinnacle West/APS June 30, 2005
Form 10-Q Report, File Nos. 1-8962 and
1-4473
    
    8-9-05
 
 a
    
    Reports filed under File No. 1-4473 and 1-8962 were filed in the office of the
Securities and Exchange Commission located in Washington, D.C.b
    
    Management contract or compensatory plan or arrangement to be filed as an exhibit
pursuant to Item 15(b) of Form 10-K.c
    
    An additional document, substantially identical in all material respects to this
Exhibit, has been entered into, relating to an additional Equity Participant. Although such
additional document
may differ in other respects (such as dollar amounts, percentages, tax indemnity matters, and dates
of execution), there are no material details in which such document differs from this Exhibit.d
    
    Additional agreements, substantially identical in all material respects to this
Exhibit have been entered into with additional persons. Although such additional documents may
differ in other respects (such as dollar amounts and dates of execution), there are no material
details in which such agreements differ from this Exhibit. 207




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##### Table of Contents



SIGNATURES
  Date: February 20, 2009
    PINNACLE WEST CAPITAL CORPORATION       
                      
(Registrant)/s/ William J. Post(William J. Post, Chairman of theBoard of Directors and Chief Executive Officer) Power of Attorney
   Signature
    
    Title
    
    Date/s/ William J. Post

(William J. Post, Chairman
of the Board of Directors and
Chief Executive Officer)
    
    Principal Executive Officer
and Director
    
   February 20, 2009/s/ James R. Hatfield

(James R. Hatfield,
Senior Vice President and
Chief Financial Officer)
    
    Principal Financial Officer and Principal Accounting Officer
    
    February 20, 2009
 208




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##### Table of Contents



Signature
    
    Title
    
    Date/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




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##### Table of Contents



SIGNATURES
  ARIZONA PUBLIC SERVICE COMPANY
             
              (Registrant)Date:  February 20, 2009
    /s/ Donald E. Brandt(Donald E. Brandt, Chief Executive Officer) Power of Attorney
   Signature
    
    Title
    
    Date/s/ William J. Post

(William J. Post, Chairman
of the Board of Directors)
    
    Director
    
    February 20, 2009/s/ Donald E. Brandt

(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 Officer
and Principal Accounting
Officer
    
    February 20, 2009
 210




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##### Table of Contents



Signature
    
    Title
    
    Date/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
 211