##### Table of Contents



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, 2006
 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
    
    86-0512431(An Arizona corporation)400 North Fifth Street, P.O. Box 53999Phoenix, Arizona 85072-3999(602) 250-10001-4473
    
    ARIZONA PUBLIC SERVICE COMPANY
    
    86-0011170(An Arizona corporation)400 North Fifth Street, P.O. Box 53999Phoenix, Arizona 85072-3999(602) 250-1000
 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 Value
    
    Pacific Stock ExchangeARIZONA PUBLIC SERVICE COMPANY
    
    None
    
    None
 Securities registered pursuant to Section 12(g) of the Act:
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
 PINNACLE WEST CAPITAL CORPORATION
    
    Yes þ
    
    No oARIZONA PUBLIC SERVICE COMPANY
    
    Yes o
    
    No þ
  PINNACLE WEST CAPITAL CORPORATION
    
    Yes o
    
    No þARIZONA PUBLIC SERVICE COMPANY
    
    Yes o
    
    No þ
  PINNACLE WEST CAPITAL CORPORATION
    
    Yes þ
    
    No oARIZONA PUBLIC SERVICE COMPANY
    
    Yes þ
    
    No o
 þ
   þ o o
  o o þ
 o þ
  PINNACLE WEST CAPITAL CORPORATION
    
    $3,946,188,585 as of June 30, 2006ARIZONA PUBLIC SERVICE COMPANY
    
    $0 as of June 30, 2006
  PINNACLE WEST CAPITAL CORPORATION
    

100,011,597
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.




---



##### 



TABLE OF CONTENTS
 PageGLOSSARYPART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    15Item 1B. Unresolved Staff Comments
    
    
    23Item 2. Properties
    
    
    24Item 3. Legal Proceedings
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Supplemental ItemExecutive Officers of Pinnacle West
    
    
    30PART IIItem 5. Market for Registrants Common Equity, Pinnacle West Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    32Item 6. Selected Financial Data
    
    
    34Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    36Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    67Item 8. Financial Statements and Supplementary Data
    
    
    68Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    150Item 9A. Controls and Procedures
    
    
    150Item 9B. Other Information
    
    
    151PART IIIItem 10.
Directors, Executive Officers and Corporate Governance of Pinnacle West
    
    
    151Item 11. Executive Compensation
    
    
    151Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    151Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    152Item 14. Principal Accountant Fees and Services
    
    
    152PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    153SIGNATURES
    
    
    194EX-10.78EX-12.1EX-12.2EX-12.3EX-21.1EX-23.1EX-23.2EX-31.1EX-31.2EX-31.3EX-31.4EX-32.1EX-32.2EX-99.29EX-99.30
  i




---



##### Table of Contents








---



##### Table of Contents



2




---



##### Table of Contents



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 are 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




---



##### Table of Contents



Business Segments
  
    
    the regulated electricity segment (77% of operating revenues in 2006), 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 (12% of operating revenues in 2006), which consists of
SunCors real estate development and investment activities.
  APS Rate Proceedings
  Employees
  Available Information
 www.pinnaclewest.com
 www.pinnaclewest.com,
 4




---



##### Table of Contents




    
    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; and
    
    Director Independence Standards.
   Forward-Looking Statements
  
    
    state and federal regulatory and legislative decisions and actions, including the
outcome and timing of APS retail rate proceedings pending before the ACC;
    
    the timely recovery of PSA deferrals, including such deferrals in 2005 and 2006
associated with unplanned Palo Verde outages and reduced power operations that are the
subject of ACC prudence reviews;
    
    the ongoing restructuring of the electric industry, including the introduction of
retail electric competition in Arizona and decisions impacting wholesale competition;
    
    the outcome of regulatory, legislative and judicial proceedings, both current and
future, relating to the restructuring;
    
    market prices for electricity and natural gas;
    
    power plant performance and outages;
    
    transmission outages and constraints;
    
    weather variations affecting local and regional customer energy usage;
    
    customer growth and energy usage;
    
    regional economic and market conditions, including the results of litigation and
other proceedings resulting from the California energy situation, volatile fuel and
purchased power costs and the completion of generation and transmission
 5




---



##### Table of Contents



construction in the region, which could affect customer growth and the cost of power
supplies;
    
    the cost of debt and equity capital and access to capital markets;
    
    current credit ratings remaining in effect for any given period of time;
    
    our ability to compete successfully outside traditional regulated markets (including
the wholesale market);
    
    the performance of our marketing and trading activities due to volatile market
liquidity and 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
and the interpretation of those principles;
    
    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;
    
    technological developments in the electric industry;
    
    the strength of 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.
 REGULATION AND COMPETITION
 Retail
    6




---



##### Table of Contents



Wholesale
 General
  BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
 General
   Purchased Power and Generating Fuel
  2006 Energy Mix
  Coal Supply
 Cholla
 7




---



##### Table of Contents



Four Corners
 Navajo Generating Station
   Natural Gas Supply
  Nuclear Fuel Supply
 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.
  8




---



##### Table of Contents



Spent Nuclear Fuel and Waste Disposal
 Purchased Power
    Construction Program
  9




---



##### Table of Contents



Estimate2007
    
    
    2008
    
    
    2009Major facilities:Distribution
    
    $
    361
    
    
    $
    414
    
    
    $
    459Transmission
    
    
    173
    
    
    
    195
    
    
    
    288Generation
    
    
    333
    
    
    
    304
    
    
    
    313Other
    
    
    26
    
    
    
    37
    
    
    
    40Total
    
    $
    893
    
    
    $
    950
    
    
    $
    1,100
   Environmental Matters
 EPA Environmental Regulation
 Regional Haze Rules
     10




---



##### Table of Contents



Mercury
  Federal Implementation Plan
  Superfund nd
 11




---



##### Table of Contents



Manufactured Gas Plant Sites
 Navajo Nation Environmental Issues
     12




---



##### Table of Contents



West Phoenix Power Plant
  Water Supply
     13




---



##### Table of Contents



Federal Energy Legislation
  BUSINESS OF SUNCOR DEVELOPMENT COMPANY
    14




---



##### Table of Contents



BUSINESS OF OTHER SUBSIDIARIES
      
 ITEM 1A. RISK FACTORS
  15




---



##### Table of Contents



APS is subject to comprehensive government regulation by several federal, state and local
regulatory agencies that significantly affect its business and results of operations.
    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.
    16




---



##### Table of Contents



Concern over climate change could result in significant  legislative and regulatory
efforts to limit greenhouse gas emissions.
 .
 There are inherent risks in the operation of nuclear facilities, such as environmental, health
and financial risks and the risk of terrorist attack.
   17




---



##### Table of Contents



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.
  Deregulation or restructuring of the electric industry may result in increased competition,
which could have a significant adverse impact on our business and our financial results.
   Changes in technology may adversely affect our business.
  Our results of operations can be adversely affected by milder weather.
  18




---



##### Table of Contents



Our cash flow largely depends on the performance of our subsidiaries.
   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.
  If we are not able to access capital at competitive rates, our ability to implement our
financial strategy will be adversely affected.
  
    
    an economic downturn;
    
    the bankruptcy of an unrelated energy company;
    
    increased market prices for electricity and gas;
 19




---



##### Table of Contents




    
    terrorist attacks or threatened attacks on our facilities or those of unrelated
energy companies;
    
    changes in technology; 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 to our competitors that have less
debt.
 A further 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 and changing interest
rates and market conditions could result in financial losses that negatively impact our results of
operations.
  20




---



##### Table of Contents



Actual results could differ from estimates used to prepare our financial statements.
  
    
    Regulatory Accounting  Regulatory accounting allows for the actions of
regulators, such as the ACC and the FERC, to be reflected in our financial statements.
Their actions may cause us to capitalize costs that would otherwise be included as an
expense in the current period by unregulated companies. If future recovery of costs
ceases to be probable, the assets would be written off as a charge in current period
earnings. A major component of our regulatory assets is the retail fuel and purchased
power costs deferred under the PSA, a portion of which is subject to a prudence review
by the ACC as a result of unplanned Palo Verde outages in 2005 and 2006.
    
    Pensions and Other Postretirement Benefit Accounting  Changes in our actuarial
assumptions used in calculating our pension and other postretirement benefit liability
and expense can have a significant impact on our earnings and financial position. The
most relevant actuarial assumptions are the discount rate used to measure our liability
and net periodic cost, the expected long-term rate of return on plan assets used to
estimate earnings on invested funds over the long-term, and the assumed healthcare cost
trend rates. We review these assumptions on an annual basis and adjust them as
necessary.
 21




---



##### Table of Contents




    
    Derivative Accounting  Derivative accounting requires evaluation of rules that are
complex and subject to varying interpretations. Our evaluation of these rules, as they
apply to our contracts, will determine whether we use accrual accounting (for contracts
designated as normal) or fair value (mark-to-market) accounting. Mark-to-market
accounting requires that changes in the fair value are recognized periodically in
income unless certain hedge criteria are met. For fair value hedges, the gain or loss
on the derivative as well as the offsetting loss or gain on the hedged item associated
with the hedged risk are recognized in earnings. For cash flow hedges, the effective
portion of changes in the fair value of the derivative is recognized in common stock
equity (as a component of other comprehensive income (loss)) and are recognized in
earnings when the related transaction occurs.
 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 developments;
    
    our dividend policy;
    
    future sale of our equity or equity-linked securities; and
    
    general domestic and international economic conditions.
  22




---



##### Table of Contents



We may enter into credit and other agreements from time to time that restrict our ability to
pay dividends.
  SunCors business and financial performance could be adversely affected by a variety of
factors affecting the real estate market.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
 .
 23




---



##### Table of Contents



ITEM 2. PROPERTIES
 Regulated Electricity Segment Properties
 Capacity
  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-two combustion turbine units
    
    
    992,000Seven combined cycle units
    
    
    1,862,000Subtotal
    
    
    3,284,000Nuclear:29.1% owned or leased Units 1, 2 and 3 at Palo Verde
    
    
    1,126,752Solar
    
    
    5,816Total
    
    
    6,157,568
 Reserve Margin
   24




---



##### Table of Contents



Plant Sites Leased from Navajo Nation
  Palo Verde Nuclear Generating Station
 Regulatory
   Nuclear Decommissioning Costs
   Palo Verde Liability and Insurance Matters
  25




---



##### Table of Contents



Property Not Held in Fee or Subject to Encumbrances
 Jointly-Owned Facilities
  Percent OwnedGenerating facilities:Palo Verde Units 1 and 3
    
    
    29.1
    %Palo Verde Unit 2 (see Palo Verde Leases
below)
    
    
    17.0
    %Four Corners Units 4 and 5
    
    
    15.0
    %Navajo Generating Station Units 1, 2 and 3
    
    
    14.0
    %Cholla common facilities (a)
    
    
    63.2
    %(b)Transmission facilities:ANPP 500KV System
    
    
    35.8
    %(b)Navajo Southern System
    
    
    31.4
    %(b)Palo Verde  Yuma 500KV System
    
    
    23.9
    %(b)Four Corners Switchyards
    
    
    27.5
    %(b)Phoenix  Mead System
    
    
    17.1
    %(b)Palo Verde  Estrella 500KV System
    
    
    55.5
    %(b)Harquahala
    
    
    80.0
    %(b)
 
 (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.
 Palo Verde Leases
  Transmission
and Distribution Facilities
  26




---



##### Table of Contents



Other Information Regarding Our Properties
   Real Estate Segment Properties
  27




---



##### Table of Contents



APS Service Territory Map
 
 28




---



##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS
    
 ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
  29




---



##### Table of Contents



SUPPLEMENTAL ITEM.
EXECUTIVE OFFICERS OF PINNACLE WEST
  Name
    

Age
at February 28, 2007
    

Position(s)
at February 28, 2007William J. Post
    
    
    56
    
    
    Chairman of the Board and
Chief Executive Officer (1)Jack E. Davis
    
    
    60
    
    
    President and Chief
Operating Officer, and Chief
Executive Officer, APS (1)Donald E. Brandt
    
    
    52
    
    
    Executive Vice President and
Chief Financial Officer, and
President and Chief
Financial Officer of APSRandall K. Edington
    
    
    53
    
    
    Senior Vice President and
Chief Nuclear Officer, APSArmando B. Flores
    
    
    63
    
    
    Executive Vice President,
Corporate Business Services,
APSChris N. Froggatt
    
    
    49
    
    
    Vice President and
Controller, APSBarbara M. Gomez
    
    
    52
    
    
    Vice President and TreasurerNancy C. Loftin
    
    
    53
    
    
    Vice President, General
Counsel and SecretaryDonald G. Robinson
    
    
    53
    
    
    Vice President, Planning, APSSteven M. Wheeler
    
    
    58
    
    
    Executive Vice President,
Customer Service and
Regulation, APS
 
 (1)
    
    Member of the Board of Directors.
   30




---



##### Table of Contents



31




---



##### Table of Contents



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
   Dividends2006
    
    High
    
    Low
    
    Close
    
    Per Share1st Quarter
    
    $
    44.14
    
    
    $
    38.76
    
    
    $
    39.10
    
    
    $
    0.5002nd Quarter
    
    
    41.06
    
    
    
    38.31
    
    
    
    39.91
    
    
    
    0.5003rd Quarter
    
    
    45.99
    
    
    
    39.90
    
    
    
    45.05
    
    
    
    0.5004th Quarter
    
    
    51.00
    
    
    
    45.12
    
    
    
    50.69
    
    
    
    0.525
 Dividends2005
    
    High
    
    Low
    
    Close
    
    Per Share1st Quarter
    
    $
    44.87
    
    
    $
    40.99
    
    
    $
    42.51
    
    
    $
    0.4752nd Quarter
    
    
    45.34
    
    
    
    41.29
    
    
    
    44.45
    
    
    
    0.4753rd Quarter
    
    
    46.68
    
    
    
    43.13
    
    
    
    44.08
    
    
    
    0.4754th Quarter
    
    
    44.97
    
    
    
    39.81
    
    
    
    41.35
    
    
    
    0.500
   Common Stock Dividends
(Dollars in Thousands)
 Quarter
    
    2006
    
    20051st Quarter
    
    $
    42,500
    
    
    $
    42,5002nd Quarter
    
    
    42,500
    
    
    
    3rd Quarter
    
    
    42,500
    
    
    
    4th Quarter
    
    
    42,500
    
    
    
    127,500
  32




---



##### Table of Contents



Issuer Purchases of Equity Securities
  (c) Total Number(a) Total
    
    
    
    of Shares
    
    (d) Maximum NumberNumber of
    
    (b)
    
    Purchased
    
    of SharesShares
    
    Average
    
    as Part of Publicly
    
    that May Yet BePurchased
    
    Price Paid
    
    Announced Plans
    
    Purchased Under thePeriod
    
    (1)
    
    per Share
    
    or Programs
    
    Plans or ProgramsOctober 1  October 31, 2006
   
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 1  November 30, 2006
    
    
    907
    
    
    $
    47.79
    
    
    
    
    
    
    
    December 1  December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    907
    
    
    $
    47.79
 
 (1)
    
    Represents shares of common stock withheld by Pinnacle West to satisfy tax withholding
obligations upon the vesting of restricted stock. 33




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
PINNACLE WEST CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
 2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(dollars in thousands, except per share amounts)OPERATING RESULTSOperating revenues:Regulated electricity segment
    
    $
    2,635,036
    
    
    $
    2,237,145
    
    
    $
    2,035,247
    
    
    $
    1,978,075
    
    
    $
    1,890,391Real estate segment
    
    
    399,798
    
    
    
    338,031
    
    
    
    350,315
    
    
    
    361,604
    
    
    
    201,081Marketing and trading
    
    
    330,742
    
    
    
    351,558
    
    
    
    400,628
    
    
    
    391,196
    
    
    
    286,879Other revenues
    
    
    36,172
    
    
    
    61,221
    
    
    
    42,816
    
    
    
    27,929
    
    
    
    26,899Total operating revenues
    
    $
    3,401,748
    
    
    $
    2,987,955
    
    
    $
    2,829,006
    
    
    $
    2,758,804
    
    
    $
    2,405,250Income from continuing operations (a)
    
    
    317,143
    
    
    
    223,163
    
    
    
    246,590
    
    
    
    225,384
    
    
    
    236,563Discontinued operations  net of income
taxes (b)
    
    
    10,112
    
    
    
    (46,896
    )
    
    
    (3,395
    )
    
    
    15,195
    
    
    
    (21,410
    )Cumulative effect of change in accounting
 net of income taxes (c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,745
    )Net income
    
    $
    327,255
    
    
    $
    176,267
    
    
    $
    243,195
    
    
    $
    240,579
    
    
    $
    149,408COMMON STOCK DATABook value per share  year-end
    
    $
    34.48
    
    
    $
    34.58
    
    
    $
    32.14
    
    
    $
    30.97
    
    
    $
    29.40Earnings (loss) per weighted average
common share outstanding:Continuing operations  basic
    
    $
    3.19
    
    
    $
    2.31
    
    
    $
    2.70
    
    
    $
    2.47
    
    
    $
    2.79Discontinued operations (b)
    
    
    0.10
    
    
    
    (0.48
    )
    
    
    (0.04
    )
    
    
    0.17
    
    
    
    (0.26
    )Cumulative effect of change
in accounting (c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.77
    )Net income  basic
    
    $
    3.29
    
    
    $
    1.83
    
    
    $
    2.66
    
    
    $
    2.64
    
    
    $
    1.76Continuing operations  diluted
    
    $
    3.17
    
    
    $
    2.31
    
    
    $
    2.69
    
    
    $
    2.47
    
    
    $
    2.78Net income  diluted
    
    $
    3.27
    
    
    $
    1.82
    
    
    $
    2.66
    
    
    $
    2.63
    
    
    $
    1.76Dividends declared per share
    
    $
    2.025
    
    
    $
    1.925
    
    
    $
    1.825
    
    
    $
    1.725
    
    
    $
    1.625Indicated annual dividend rate
per share  year-end
    
    $
    2.10
    
    
    $
    2.00
    
    
    $
    1.90
    
    
    $
    1.80
    
    
    $
    1.70Weighted-average common shares
outstanding  basic
    
    
    99,417,008
    
    
    
    96,483,781
    
    
    
    91,396,904
    
    
    
    91,264,696
    
    
    
    84,902,946Weighted-average common shares
outstanding  diluted
    
    
    100,010,108
    
    
    
    96,589,949
    
    
    
    91,532,473
    
    
    
    91,405,134
    
    
    
    84,963,921BALANCE SHEET DATATotal assets
    
    $
    11,455,943
    
    
    $
    11,322,645
    
    
    $
    9,896,747
    
    
    $
    9,519,042
    
    
    $
    9,139,157Liabilities and equity:Long-term debt less current maturities
    
    $
    3,232,633
    
    
    $
    2,608,455
    
    
    $
    2,584,985
    
    
    $
    2,616,585
    
    
    $
    2,743,741Other liabilities
    
    
    4,777,194
    
    
    
    5,289,226
    
    
    
    4,361,566
    
    
    
    4,072,678
    
    
    
    3,709,263Total liabilities
    
    
    8,009,827
    
    
    
    7,897,681
    
    
    
    6,946,551
    
    
    
    6,689,263
    
    
    
    6,453,004Common stock equity
    
    
    3,446,116
    
    
    
    3,424,964
    
    
    
    2,950,196
    
    
    
    2,829,779
    
    
    
    2,686,153Total liabilities and equity
    
    $
    11,455,943
    
    
    $
    11,322,645
    
    
    $
    9,896,747
    
    
    $
    9,519,042
    
    
    $
    9,139,157
 
 (a)
    
    Includes regulatory disallowance of $84 million after tax in 2005. See Note 3 in Item 8.(b)
    
    Amounts related to Silverhawk, SunCor and NAC discontinued operations. See Note 22 in Item
8.(c)
    
    Represents change in accounting standards related to energy trading activities in 2002. 34




---



##### Table of Contents



SELECTED FINANCIAL DATA
ARIZONA PUBLIC SERVICE COMPANY
 2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(dollars in thousands)OPERATING RESULTSElectric operating revenues:Regulated electricity
    
    $
    2,640,989
    
    
    $
    2,244,951
    
    
    $
    2,051,602
    
    
    $
    1,999,390
    
    
    $
    1,902,112Marketing and trading
    
    
    17,524
    
    
    
    25,842
    
    
    
    145,519
    
    
    
    105,541
    
    
    
    34,054Total electric operating
revenues
    
    
    2,658,513
    
    
    
    2,270,793
    
    
    
    2,197,121
    
    
    
    2,104,931
    
    
    
    1,936,166Fuel and purchased power
costs:Regulated electricity
    
    
    965,712
    
    
    
    656,654
    
    
    
    612,300
    
    
    
    606,251
    
    
    
    438,141Marketing and trading
    
    
    4,055
    
    
    
    32,328
    
    
    
    150,954
    
    
    
    97,180
    
    
    
    32,662Operating expenses
    
    
    1,290,804
    
    
    
    1,200,198
    
    
    
    1,104,886
    
    
    
    1,103,342
    
    
    
    1,136,363Operating income
    
    
    397,942
    
    
    
    381,613
    
    
    
    328,981
    
    
    
    298,158
    
    
    
    329,000Other income (deductions)
    
    
    27,584
    
    
    
    (69,171
    )
    
    
    15,328
    
    
    
    26,347
    
    
    
    (8,041
    )Interest deductions  net
    
    
    155,796
    
    
    
    141,963
    
    
    
    144,682
    
    
    
    143,568
    
    
    
    121,616Net income
    
    $
    269,730
    
    
    $
    170,479
    
    
    $
    199,627
    
    
    $
    180,937
    
    
    $
    199,343BALANCE SHEET DATATotal assets
    
    $
    10,513,692
    
    
    $
    9,707,441
    
    
    $
    8,098,552
    
    
    $
    7,722,533
    
    
    $
    7,122,238Capital structure:Common stock equity
    
    $
    3,207,473
    
    
    $
    2,985,225
    
    
    $
    2,232,402
    
    
    $
    2,203,630
    
    
    $
    2,159,312Long-term debt less current
maturities
    
    
    2,877,502
    
    
    
    2,479,703
    
    
    
    2,267,094
    
    
    
    2,135,606
    
    
    
    2,217,340Total capitalization
    
    
    6,084,975
    
    
    
    5,464,928
    
    
    
    4,499,496
    
    
    
    4,339,236
    
    
    
    4,376,652Current maturities of
long-term
debt
    
    
    968
    
    
    
    85,620
    
    
    
    451,247
    
    
    
    487,067
    
    
    
    3,503Total
    
    $
    6,085,943
    
    
    $
    5,550,548
    
    
    $
    4,950,743
    
    
    $
    4,826,303
    
    
    $
    4,380,155
 35




---



##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTRODUCTION
  OVERVIEW
   
    
    a general retail rate case pursuant to which APS is requesting a 20.4%, or $434.6
million, increase in its annual retail electricity revenues;
    
    an application for a temporary rate increase of approximately 1.9%, through a PSA
surcharge, to recover $45 million in retail fuel and purchased power costs relating to
Palo Verdes 2005 unplanned outages that were deferred by APS in 2005 under the PSA and
are subject to the ACCs completion of an inquiry regarding the outages (this matter is
now being addressed in the general retail rate case); and
    
    the ACCs prudency review of amounts collected through the May 2, 2006 interim PSA
adjustor (see Interim Rate Increase in Note 3) related to unplanned 2006 Palo Verde
outages. The related PSA deferrals were approximately $79 million in 2006.
   36




---



##### 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.
   2006
    
    
    2005
    
    
    2004Regulated electricity (a)
    
    $
    259
    
    
    $
    167
    
    
    $
    152Real estate
    
    
    50
    
    
    
    35
    
    
    
    40Other (b)
    
    
    8
    
    
    
    21
    
    
    
    55Income from continuing operations
    
    
    317
    
    
    
    223
    
    
    
    247Discontinued operations  net of tax:Real estate (c)
    
    
    10
    
    
    
    17
    
    
    
    4Sale of Silverhawk (d)
    
    
    1
    
    
    
    (67
    )
    
    
    (12
    )Sale of NAC
    
    
    (1
    )
    
    
    3
    
    
    
    4Net income
    
    $
    327
    
    
    $
    176
    
    
    $
    243
 
 (a)
    
    Includes an $84 million after-tax regulatory disallowance of plant costs in
2005 in accordance with APS 2003 general retail rate case settlement.(b)
    
    Primarily marketing and trading activity.(c)
    
    Primarily relates to sales of commercial properties.(d)
    
    See Note 22. 37




---



##### Table of Contents



PINNACLE WEST CONSOLIDATED  RESULTS OF OPERATIONS
 General
  Deferred Fuel and Purchased Power Costs
     38




---



##### Table of Contents



2006 Compared with 2005
  
    
    Regulated Electricity Segment  Income from continuing operations increased
approximately $92 million primarily due to an $84 million after-tax regulatory
disallowance of plant costs recorded in 2005. Income also increased due to higher
retail sales volumes due to customer growth; income tax credits related to prior years
resolved in 2006; and increased other income due to higher interest income on higher
investment balances. These positive factors were partially offset by higher operations
and maintenance expense related to generation and customer service; and higher
depreciation and amortization primarily due to increased plant asset balances,
partially offset by lower depreciation rates. In addition, higher fuel and purchased
power costs of $74 million after-tax were partially offset by the deferral of $45
million after-tax of costs in accordance with the PSA. See discussion  Deferred Fuel
and Purchased Power Costs above.
    
    Real Estate Segment  Income from continuing operations increased approximately $15
million primarily due to increased margins on residential sales and the sale of certain
joint venture assets, partially offset by higher general and administrative expenses.
Income from discontinued operations decreased $7 million due to lower commercial
property sales.
    
    Other  Income from continuing operations decreased approximately $13 million
primarily due to lower mark-to-market gains, partially offset by higher unit margins on
wholesale sales and competitive retail sales in California.
 39




---



##### Table of Contents



Increase (Decrease)Pretax
    
    
    After TaxRegulated electricity segment gross margin:Higher fuel and purchased power costs (see Deferred Fuel and
Purchased Power Costs above)
    
    $
    (121
    )
    
    $
    (74
    )Increased deferred fuel and purchased power costs (deferrals
began April 1, 2005)
    
    
    73
    
    
    
    45Higher retail sales volumes due to customer growth,
excluding weather effects
    
    
    87
    
    
    
    53Miscellaneous items, net
    
    
    (7
    )
    
    
    (4
    )Net increase in regulated electricity segment gross margin
    
    
    32
    
    
    
    20Lower marketing and trading gross margin primarily related to
lower mark-to-market gains, partially offset by higher unit
margins on wholesale sales and competitive retail sales in
California
    
    
    (18
    )
    
    
    (11
    )Higher real estate segment contribution primarily related to
increased margins on residential sales and the sale of
certain joint venture assets
    
    
    25
    
    
    
    15Regulatory disallowance of plant costs in 2005, in accordance with
APS 2003 general retail rate case settlement
    
    
    139
    
    
    
    84Operations and maintenance increases primarily due to:Generation costs, including increased maintenance and
overhauls
    
    
    (41
    )
    
    
    (25
    )Customer service costs, including regulatory demand-side
management programs and planned maintenance
    
    
    (16
    )
    
    
    (10
    )Miscellaneous items, net
    
    
    2
    
    
    
    1Higher depreciation and amortization primarily due to increased
plant asset balances partially offset by lower depreciation rates
    
    
    (11
    )
    
    
    (7
    )Higher other income, net of expense, primarily due to
miscellaneous asset sales and increased interest income on higher
investment balances
    
    
    12
    
    
    
    7Income tax credits related to prior years resolved in 2006
    
    
    
    
    
    
    14Miscellaneous items, net
    
    
    
    
    
    
    6Net increase in income from continuing operations
    
    $
    124
    
    
    
    94Discontinued operations:Silverhawk loss in 2005
    
    
    
    
    
    
    68Lower commercial property real estate sales
    
    
    
    
    
    
    (7
    )Sale of NAC International Inc.
    
    
    
    
    
    
    (4
    )Net increase in net income
    
    
    
    
    
    $
    151
 Regulated Electricity Segment Revenues
  
    
    a $265 million increase in 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 Deferred Fuel and Purchased Power
Costs above);
 40




---



##### Table of Contents




    
    a $124 million increase in retail revenues related to customer growth,
excluding weather effects;
    
    a $6 million increase in Off-System Sales primarily resulting from $12
million of sales previously reported in marketing and trading that were classified
beginning in April 2005 as sales in the regulated electricity segment in accordance
with APS 2003 general retail rate case settlement, partially offset by $6 million of
lower Off-System Sales in 2006; and
    
    a $3 million increase due to miscellaneous factors.
 Real Estate Segment Revenues
  
    
    a $55 million increase in residential sales due to higher prices and volumes; and
    
    a $7 million increase in commercial real estate sales.
 Other Revenues
   
    
    a $20 million decrease in mark-to-market gains on contracts for future
delivery due to changes in forward prices;
    
    a $12 million decrease in Off-System Sales due to the absence of sales
previously reported in marketing and trading that were classified beginning in April
2005 as sales in the regulated electricity segment in accordance with APS 2003 general
retail rate case settlement;
    
    a $23 million increase from higher prices on competitive retail sales in
California; and
    
    a $12 million decrease due to miscellaneous factors.
 2005 Compared with 2004
  41




---



##### Table of Contents




    
    Regulated Electricity Segment  Income from continuing operations increased
approximately $15 million primarily due to deferred fuel and purchased power costs; a
retail price increase effective April 1, 2005; higher retail sales volumes due to
customer growth; lower depreciation due to lower depreciation rates; lower regulatory
asset amortization; and effects of weather on retail sales. These positive factors
were partially offset by the regulatory disallowance of plant costs in accordance with
the APS retail rate case settlement; higher fuel and purchased power costs primarily
due to higher prices and more plant outage days; higher operations and maintenance
expense related to generation and customer service; and higher property taxes due to
increased plant in service.
    
    Real Estate Segment  Income from continuing operations decreased approximately $5
million primarily due to decreased parcel sales, partially offset by increased margins
on home sales. Income from discontinued real estate operations increased $13 million
due to higher commercial property sales.
    
    Other  Income from continuing operations decreased approximately $34 million
primarily due to an after-tax gain related to the sale of a limited partnership
interest in the Phoenix Suns recorded in 2004 and due to lower unit margins on
competitive retail sales in California.
 42




---



##### Table of Contents



Increase (Decrease)Pretax
    
    
    After TaxRegulated electricity segment gross margin:Deferred fuel and purchased power costs (see Deferred
Fuel and Purchased Power Costs above)
    
    $
    171
    
    
    $
    104Retail price increase effective April 1, 2005
    
    
    65
    
    
    
    40Higher retail sales volumes due to customer growth,
excluding weather effects
    
    
    58
    
    
    
    35Effects of weather on retail sales
    
    
    14
    
    
    
    9Higher fuel and purchased power costs primarily due to
higher prices and more plant outage days
    
    
    (126
    )
    
    
    (77
    )Miscellaneous items, net
    
    
    (8
    )
    
    
    (5
    )Net increase in regulated electricity segment gross margin
    
    
    174
    
    
    
    106Lower real estate segment contribution primarily related to
decreased parcel sales, partially offset by increased
margins on home sales
    
    
    (8
    )
    
    
    (5
    )Lower marketing and trading gross margin primarily due to lower
unit margins on competitive retail sales in California
    
    
    (21
    )
    
    
    (13
    )Regulatory disallowance, in accordance with the APS retail rate
case settlement
    
    
    (139
    )
    
    
    (84
    )Lower other income primarily due to sale of limited partnership
interest in Phoenix Suns recorded in the prior year,
partially offset by higher interest income
    
    
    (30
    )
    
    
    (18
    )Operations and maintenance increases primarily due to:Generation costs, including maintenance and overhauls
    
    
    (20
    )
    
    
    (12
    )Customer service costs, including regulatory demand-side
management programs and planned maintenance
    
    
    (20
    )
    
    
    (12
    )Miscellaneous items, net
    
    
    (4
    )
    
    
    (2
    )Depreciation and amortization decreases primarily due to:Lower regulatory asset amortization
    
    
    22
    
    
    
    13Lower depreciation rates, partially offset by
increased depreciable assets
    
    
    22
    
    
    
    13Higher property taxes primarily due to increased plant in service
    
    
    (11
    )
    
    
    (7
    )Miscellaneous items, net
    
    
    2
    
    
    
    (3
    )Net decrease in income from continuing operations
    
    $
    (33
    )
    
    
    (24
    )Discontinued operations related to:Sale of Silverhawk
    
    
    
    
    
    
    (56
    )Sales of real estate assets and other
    
    
    
    
    
    
    13Net decrease in net income
    
    
    
    
    
    $
    (67
    )
 43




---



##### Table of Contents



Regulated Electricity Segment Revenues
  
    
    an $81 million increase in retail revenues related to customer growth,
excluding weather effects;
    
    a $65 million increase in retail revenues due to a price increase
effective April 1, 2005;
    
    a $40 million increase in Off-System Sales primarily resulting from
sales previously reported as marketing and trading revenues that were classified
beginning in April 2005 as sales in the regulated electricity segment in accordance
with the APS retail rate case settlement;
    
    an $11 million increase in retail revenues related to weather; and
    
    a $5 million increase due to miscellaneous factors.
 Real Estate Segment Revenues
  Other Revenues
  
    
    a $40 million decrease in Off-System Sales due to the absence of sales
previously reported as marketing and trading revenues that were classified beginning in
April 2005 as sales in the regulated electricity segment in accordance with the APS
retail rate case settlement;
    
    an $18 million increase due to increased sales of energy-related
products and services by APS Energy Services; and
    
    a $9 million decrease due to miscellaneous factors.
 44




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Capital Needs and Resources  Pinnacle West Consolidated
 Capital Expenditure Requirements
  CAPITAL EXPENDITURES
 Actual
    
    
    Estimated2006
    
    
    2007
    
    
    2008
    
    
    2009APSDistribution
    
    $
    357
    
    
    $
    361
    
    
    $
    414
    
    
    $
    459Transmission
    
    
    113
    
    
    
    173
    
    
    
    195
    
    
    
    288Generation
    
    
    176
    
    
    
    333
    
    
    
    304
    
    
    
    313Other (a)
    
    
    16
    
    
    
    26
    
    
    
    37
    
    
    
    40Subtotal
    
    
    662
    
    
    
    893
    
    
    
    950
    
    
    
    1,100SunCor (b)
    
    
    201
    
    
    
    131
    
    
    
    101
    
    
    
    100Other
    
    
    7
    
    
    
    13
    
    
    
    19
    
    
    
    11Total
    
    $
    870
    
    
    $
    1,037
    
    
    $
    1,070
    
    
    $
    1,211
 
 (a)
    
    Primarily information systems and facilities projects.(b)
    
    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.    45




---



##### Table of Contents



Contractual Obligations
  2008-
    
    
    2010-2007
    
    
    2009
    
    
    2011
    
    
    Thereafter
    
    
    TotalLong-term debt payments,
including interest: (a)APS
    
    $
    158
    
    
    $
    316
    
    
    $
    929
    
    
    $
    3,600
    
    
    $
    5,003Pinnacle West
    
    
    10
    
    
    
    20
    
    
    
    188
    
    
    
    
    
    
    
    218SunCor
    
    
    14
    
    
    
    185
    
    
    
    6
    
    
    
    
    
    
    
    205Total long-term debt payments,
including interest
    
    
    182
    
    
    
    521
    
    
    
    1,123
    
    
    
    3,600
    
    
    
    5,426Short-term debt payments,
including interest (b)
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Capital lease payments
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    6Operating lease payments
    
    
    79
    
    
    
    148
    
    
    
    133
    
    
    
    253
    
    
    
    613Minimum pension funding
requirement (c)
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Purchased power and fuel
commitments (d)
    
    
    366
    
    
    
    500
    
    
    
    412
    
    
    
    1,310
    
    
    
    2,588Purchase obligations (e)
    
    
    44
    
    
    
    11
    
    
    
    1
    
    
    
    80
    
    
    
    136Nuclear decommissioning
funding requirements
    
    
    21
    
    
    
    43
    
    
    
    48
    
    
    
    234
    
    
    
    346Total contractual commitments
    
    $
    753
    
    
    $
    1,225
    
    
    $
    1,719
    
    
    $
    5,478
    
    
    $
    9,175
 
 (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 the rates at
December 31, 2006 (see Note 6).(b)
    
    The short-term debt is primarily related to commercial paper
at Pinnacle West (see Note 5).(c)
    
    Future pension contributions are not determinable for time periods after 2007.(d)
    
    Our fuel and purchased power commitments include purchases of coal, electricity, natural gas
and nuclear fuel (see Note 11).(e)
    
    These contractual obligations include commitments for capital expenditures and other
obligations. Off-Balance Sheet Arrangements
  46




---



##### Table of Contents



Guarantees and Letters of Credit
  Credit Ratings
  Moodys
    
    Standard & Poors
    
    FitchPinnacle WestSenior unsecured (a)
    
    Baa3 (P)
    
    BB+ (prelim)
    
    N/ACommercial paper
    
    P-3
    
    A-3
    
    F-3Outlook
    
    Negative
    
    Stable
    
    StableAPSSenior unsecured
    
    Baa2
    
    BBB-
    
    BBBSecured lease
obligation bonds
    
    Baa2
    
    BBB-
    
    BBB-Commercial paper
    
    P-2
    
    A-3
    
    F-2Outlook
    
    Negative
    
    Stable
    
    Stable
 
 (a)
    
    Pinnacle West has a shelf registration under SEC Rule 415. Pinnacle West
currently has no outstanding, rated senior unsecured securities. However, Moodys
assigns a provisional (P) rating and Standard & Poors assigns a preliminary (prelim)
rating to the senior unsecured securities under such shelf registrations. 47




---



##### Table of Contents



Debt Provisions
     Capital Needs and Resources
 Pinnacle West (Parent Company)
   48




---



##### Table of Contents



APS
  49




---



##### Table of Contents



Other Subsidiaries
  50




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
  Regulatory Accounting
    51




---



##### Table of Contents



Pensions and Other Postretirement Benefit Accounting
   Increase (Decrease)Impact on
    
    Impact onPension
    
    PensionActuarial Assumption (a)
    
    Liability
    
    ExpenseDiscount rate:Increase 1%
    
    $
    (217
    )
    
    $
    (9
    )Decrease 1%
    
    
    249
    
    
    
    9Expected long-term rate
of return on plan
assets:Increase 1%
    
    
    
    
    
    
    (5
    )Decrease 1%
    
    
    
    
    
    
    5
 
 (a)
    
    Each fluctuation assumes that the other assumptions of the calculation are held constant while
the rates are changed by one percentage point.  52




---



##### Table of Contents



Increase (Decrease)Impact on Other
    
    Impact on OtherPostretirement Benefit
    
    Postretirement BenefitActuarial Assumption (a)
    
    Obligation
    
    ExpenseDiscount rate:Increase 1%
    
    $
    (92
    )
    
    $
    (5
    )Decrease 1%
    
    
    108
    
    
    
    5Health care cost trend
rate (b):Increase 1%
    
    
    105
    
    
    
    8Decrease 1%
    
    
    (87
    )
    
    
    (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
   53




---



##### Table of Contents



OTHER ACCOUNTING MATTERS
     
    
    See Note 8 and Note S-6 for a discussion of SFAS No. 158 on pension and other postretirement
plans.
    
    See Note 16 for a discussion of the accounting standard (SFAS No. 123(R)) on
stock-based compensation.
 PINNACLE WEST CONSOLIDATED  FACTORS AFFECTING
OUR FINANCIAL OUTLOOK
 Factors Affecting Operating Revenues, Fuel and Purchased Power Costs
 General
 Retail Rate Proceedings
 54




---



##### Table of Contents



Fuel and Purchased Power Costs
 Customer and Sales Growth
  Weather
 Wholesale Market Conditions
 Other Factors Affecting Financial Results
 Operations and Maintenance Expenses
 55




---



##### Table of Contents



Depreciation and Amortization Expenses
 Property Taxes
 Interest Expense
 Retail Competition
 Subsidiaries
  General
 Market Risks
  Interest Rate and Equity Risk
  56




---



##### Table of Contents



Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2006
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2007
    
    
    6.26
    %
    
    $
    35,750
    
    
    
    10.25
    %
    
    $
    112
    
    
    
    5.78
    %
    
    $
    1,5492008
    
    
    
    
    
    
    
    
    
    
    7.26
    %
    
    
    161,356
    
    
    
    5.39
    %
    
    
    7,8102009
    
    
    
    
    
    
    
    
    
    
    9.37
    %
    
    
    2,500
    
    
    
    6.23
    %
    
    
    5,3712010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.24
    %
    
    
    6,4552011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.24
    %
    
    
    576,320Years thereafter
    
    
    
    
    
    
    
    
    
    
    3.77
    %
    
    
    565,855
    
    
    
    5.81
    %
    
    
    1,916,758Total
    
    
    
    
    
    $
    35,750
    
    
    
    
    
    
    $
    729,823
    
    
    
    
    
    
    $
    2,514,263Fair Value
    
    
    
    
    
    $
    35,750
    
    
    
    
    
    
    $
    729,823
    
    
    
    
    
    
    $
    2,480,605
 Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2005
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2006
    
    
    7.11
    %
    
    $
    15,673
    
    
    
    5.38
    %
    
    $
    350
    
    
    
    6.47
    %
    
    $
    386,6242007
    
    
    
    
    
    
    
    
    
    
    5.38
    %
    
    
    350
    
    
    
    5.90
    %
    
    
    1,2712008
    
    
    
    
    
    
    
    
    
    
    5.93
    %
    
    
    128,178
    
    
    
    5.85
    %
    
    
    1,3182009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.73
    %
    
    
    1,0142010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.69
    %
    
    
    1,077Years thereafter
    
    
    
    
    
    
    
    
    
    
    3.25
    %
    
    
    565,855
    
    
    
    5.79
    %
    
    
    1,918,026Total
    
    
    
    
    
    $
    15,673
    
    
    
    
    
    
    $
    694,733
    
    
    
    
    
    
    $
    2,309,330Fair value
    
    
    
    
    
    $
    15,673
    
    
    
    
    
    
    $
    694,733
    
    
    
    
    
    
    $
    2,326,235
 57




---



##### Table of Contents



Variable-Rate
    
    
    Fixed-RateLong-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest2006
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2007
    
    
    
    
    
    $
    
    
    
    
    6.18
    %
    
    $
    1,0332008
    
    
    
    
    
    
    
    
    
    
    6.18
    %
    
    
    1,2302009
    
    
    
    
    
    
    
    
    
    
    6.17
    %
    
    
    1,0202010
    
    
    
    
    
    
    
    
    
    
    6.17
    %
    
    
    1,1112011
    
    
    
    
    
    
    
    
    
    
    6.38
    %
    
    
    401,320Years thereafter
    
    
    3.77
    %
    
    
    565,855
    
    
    
    5.81
    %
    
    
    1,916,758Total
    
    
    
    
    
    $
    565,855
    
    
    
    
    
    
    $
    2,322,472Fair Value
    
    
    
    
    
    $
    565,855
    
    
    
    
    
    
    $
    2,288,814
 Variable-Rate
    
    
    Fixed-RateLong-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest2005
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2006
    
    
    
    
    
    $
    
    
    
    
    6.71
    %
    
    $
    86,1652007
    
    
    
    
    
    
    
    
    
    
    5.76
    %
    
    
    1,0752008
    
    
    
    
    
    
    
    
    
    
    5.74
    %
    
    
    1,2712009
    
    
    
    
    
    
    
    
    
    
    5.70
    %
    
    
    1,0052010
    
    
    
    
    
    
    
    
    
    
    5.69
    %
    
    
    1,077Years thereafter
    
    
    3.25
    %
    
    
    565,855
    
    
    
    5.79
    %
    
    
    1,918,026Total
    
    
    
    
    
    $
    565,855
    
    
    
    
    
    
    $
    2,008,619Fair value
    
    
    
    
    
    $
    565,855
    
    
    
    
    
    
    $
    2,025,001
 Commodity Price Risk
  58




---



##### Table of Contents




    
    Regulated Electricity  non-trading derivative instruments that hedge our purchases
and sales of electricity and fuel for APS Native Load requirements of our regulated
electricity business segment; and
    
    Marketing and Trading  non-trading and trading derivative instruments of our
competitive business activities.
  2006
    
    
    2005Regulated
    
    
    Marketing
    
    
    Regulated
    
    
    MarketingElectricity
    
    
    and Trading
    
    
    Electricity
    
    
    and TradingMark-to-market of net positions
at beginning of period
    
    $
    335
    
    
    $
    181
    
    
    $
    33
    
    
    $
    107Recognized in earnings:Change in mark-to-market
gains (losses) for future
period
deliveries
    
    
    (12
    )
    
    
    (15
    )
    
    
    14
    
    
    
    20Mark-to-market
gains realized including
ineffectiveness
during the period
    
    
    (3
    )
    
    
    
    
    
    
    (8
    )
    
    
    (14
    )Deferred as a regulatory liability
(asset)
    
    
    (93
    )
    
    
    
    
    
    
    31
    
    
    
    Recognized in OCI:Change in mark-to-market
gains (losses) for future
period
deliveries (a)
    
    
    (285
    )
    
    
    (67
    )
    
    
    359
    
    
    
    102Mark-to-market
gains realized
during the period
    
    
    (4
    )
    
    
    (22
    )
    
    
    (94
    )
    
    
    (34
    )Change in valuation
techniques
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mark-to-market of net positions
at end of period
    
    $
    (62
    )
    
    $
    77
    
    
    $
    335
    
    
    $
    181
 
 (a)
    
    The change in regulated mark-to-market recorded in OCI is due primarily to
changes in forward natural gas prices. 59




---



##### Table of Contents



Regulated Electricity
 TotalYears
    
    
    fairSource of Fair Value
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    thereafter
    
    
    valuePrices actively quoted
    
    $
    (34
    )
    
    $
    (6
    )
    
    $
    (10
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (50
    )Prices provided by
other external sources
    
    
    13
    
    
    
    (3
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Prices based on models
and other valuation
methods
    
    
    (3
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (3
    )
    
    
    (2
    )
    
    
    (9
    )
    
    
    (21
    )Total by maturity
    
    $
    (24
    )
    
    $
    (11
    )
    
    $
    (13
    )
    
    $
    (3
    )
    
    $
    (2
    )
    
    $
    (9
    )
    
    $
    (62
    )
 Marketing and Trading
 TotalfairSource of Fair Value
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    valuePrices actively quoted
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9Prices provided by
other external sources
    
    
    40
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    59Prices based on models
and other valuation
methods
    
    
    (5
    )
    
    
    17
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    9Total by maturity
    
    $
    44
    
    
    $
    34
    
    
    $
    (1
    )
    
    $
    (1
    )
    
    $
    1
    
    
    $
    77
  December 31, 2006
    
    
    December 31, 2005Gain (Loss)
    
    
    Gain (Loss)Price Up
    
    
    Price Down
    
    
    Price Up
    
    
    Price DownCommodity
    
    10%
    
    
    10%
    
    
    10%
    
    
    10%Mark-to-market changes
reported in OCI (a):Electricity
    
    $
    38
    
    
    $
    (38
    )
    
    $
    66
    
    
    $
    (66
    )Natural gas
    
    
    80
    
    
    
    (80
    )
    
    
    103
    
    
    
    (103
    )Total
    
    $
    118
    
    
    $
    (118
    )
    
    $
    169
    
    
    $
    (169
    )
 60




---



##### Table of Contents



(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. Credit Risk
  ARIZONA PUBLIC SERVICE COMPANY  RESULTS OF OPERATIONS
 General
  Deferred Fuel and Purchased Power Costs
    61




---



##### Table of Contents



2006 Compared with 2005
  62




---



##### Table of Contents



Increase (Decrease)Pretax
    
    
    After TaxGross margin:Higher fuel and purchased power costs (see Deferred Fuel and
Purchased Power Costs above)
    
    $
    (121
    )
    
    $
    (74
    )Higher retail sales volumes due to customer growth,
excluding weather effects
    
    
    87
    
    
    
    53Increased deferred fuel and purchased power costs (deferrals
began April 1, 2005)
    
    
    73
    
    
    
    45Absence of prior year cost-based contract for PWEC Dedicated
Assets
    
    
    56
    
    
    
    34Higher marketing and trading gross margin primarily related to
higher mark-to-market gains
    
    
    20
    
    
    
    12Miscellaneous items, net
    
    
    (8
    )
    
    
    (5
    )Net increase in gross margin
    
    
    107
    
    
    
    65Regulatory disallowance of plant costs in 2005, in accordance with
APS 2003 general retail rate case settlement
    
    
    139
    
    
    
    84Operations and maintenance increases primarily due to:Generation costs, including increased maintenance and overhauls
    
    
    (41
    )
    
    
    (25
    )Costs of PWEC Dedicated Assets not included in prior year
period
    
    
    (18
    )
    
    
    (11
    )Customer service costs, including regulatory demand-side
management programs and planned maintenance
    
    
    (16
    )
    
    
    (10
    )Miscellaneous items, net
    
    
    1
    
    
    
    1Depreciation and amortization increases primarily due to:Higher depreciable assets due to transfer of PWEC Dedicated
Assets
    
    
    (14
    )
    
    
    (8
    )Higher other depreciable assets partially offset by lower
depreciation rates
    
    
    (14
    )
    
    
    (8
    )Higher interest expense, net of capitalized financing costs, primarily
due to higher debt balances and higher rates
    
    
    (14
    )
    
    
    (8
    )Higher other income, net of expense, primarily due to miscellaneous
asset sales and increased interest income on higher investment
balances
    
    
    9
    
    
    
    5Income tax credits related to prior years resolved in 2006
    
    
    
    
    
    
    11Miscellaneous items, net
    
    
    1
    
    
    
    4Net increase in income
    
    $
    140
    
    
    $
    100
 Regulated Electricity Revenues
  
    
    a $265 million increase in 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 Deferred Fuel and Purchased Power
Costs above);
 63




---



##### Table of Contents




    
    a $124 million increase in retail revenues related to customer growth,
excluding weather effects;
    
    a $6 million increase in Off-System Sales primarily resulting from $12
million of sales previously reported in marketing and trading that were classified
beginning in April 2005 as sales in regulated electricity in accordance with APS 2003
general retail rate case settlement, partially offset by $6 million of lower Off-System
Sales in 2006; and
    
    a $1 million increase due to miscellaneous factors.
 Marketing and Trading Revenues
  
    
    a $12 million decrease in Off-System Sales due to the absence of sales
previously reported in marketing and trading that were classified beginning in April
2005 as sales in regulated electricity in accordance with APS 2003 general retail rate
case settlement;
    
    a $12 million increase in mark-to-market gains on contracts for future
delivery due to changes in forward prices; and
    
    an $8 million decrease in energy trading revenues on realized sales of
electricity primarily due to lower delivered electricity prices and lower volumes.
 2005 Compared with 2004
   64




---



##### Table of Contents



Increase (Decrease)Pretax
    
    
    After TaxGross margin:Deferred fuel and purchased power costs
    
    $
    171
    
    
    $
    104Retail price increase effective April 1, 2005
    
    
    65
    
    
    
    40Higher retail sales volumes due to customer growth,
excluding weather effects
    
    
    58
    
    
    
    35Effects of weather on retail sales
    
    
    14
    
    
    
    9Higher fuel and purchased power costs primarily due to
higher prices and more plant outage days
    
    
    (146
    )
    
    
    (89
    )Miscellaneous items, net
    
    
    (14
    )
    
    
    (9
    )Net increase in gross margin
    
    
    148
    
    
    
    90Regulatory disallowance, in accordance with the retail rate settlement
    
    
    (139
    )
    
    
    (84
    )Operations and maintenance increases primarily due to:Customer service costs, including regulatory demand-side
management programs and planned maintenance
    
    
    (22
    )
    
    
    (13
    )Generation costs, including planned maintenance and overhauls
    
    
    (16
    )
    
    
    (10
    )Costs of PWEC Dedicated Assets not included in prior year
    
    
    (14
    )
    
    
    (9
    )Depreciation and amortization decreases primarily due to:Lower regulatory asset amortization
    
    
    22
    
    
    
    13Higher depreciable assets due to transfer of PWEC
Dedicated Assets, partially offset by lower depreciation rates
    
    
    (11
    )
    
    
    (7
    )Higher property taxes due to increased plant in service
    
    
    (12
    )
    
    
    (7
    )Miscellaneous items, net
    
    
    (7
    )
    
    
    (3
    )Net decrease in net income
    
    $
    (51
    )
    
    $
    (30
    )
 Regulated Electricity Revenues
  
    
    an $81 million increase in retail revenues related to customer growth,
excluding weather effects;
    
    a $65 million increase in retail revenues due to a price increase
effective April 1, 2005;
    
    a $40 million increase in Off-System Sales primarily resulting from
sales previously reported in marketing and trading that were classified beginning in
April 2005 as sales in regulated electricity in accordance with the APS retail rate
case settlement;
    
    an $11 million increase in retail revenues related to weather; and
    
    a $4 million decrease due to miscellaneous factors.
 Marketing and Trading Revenues
  65




---



##### Table of Contents




    
    a $69 million decrease in energy trading revenues on realized sales of
electricity primarily due to lower delivered electricity prices and lower volumes;
    
    a $40 million decrease in Off-System Sales due to the absence of sales
previously reported in marketing and trading that were classified beginning in April
2005 as sales in regulated electricity in accordance with the APS retail rate case
settlement; and
    
    an $11 million decrease on future mark-to-market gains due to higher
prices.
 LIQUIDITY AND CAPITAL RESOURCES  ARIZONA PUBLIC SERVICE COMPANY
 Contractual Obligations
  2008-
    
    
    2010-
    
    
    There-2007
    
    
    2009
    
    
    2011
    
    
    after
    
    
    TotalLong-term debt payments,
including interest (a)
    
    $
    158
    
    
    $
    316
    
    
    $
    929
    
    
    $
    3,600
    
    
    $
    5,003Capital lease payments
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    6Operating lease payments
    
    
    72
    
    
    
    136
    
    
    
    123
    
    
    
    234
    
    
    
    565Purchase power and fuel
commitments (b)
    
    
    306
    
    
    
    472
    
    
    
    406
    
    
    
    1,304
    
    
    
    2,488Minimum pension funding
requirement (c)
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Purchase obligations (d)
    
    
    44
    
    
    
    11
    
    
    
    1
    
    
    
    80
    
    
    
    136Nuclear decommissioning
funding requirements
    
    
    21
    
    
    
    43
    
    
    
    48
    
    
    
    234
    
    
    
    346Total contractual
commitments
    
    $
    625
    
    
    $
    980
    
    
    $
    1,509
    
    
    $
    5,453
    
    
    $
    8,567
 
 (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 the rates at December
31, 2006 (see Note 6).(b)
    
    APS purchase power and fuel commitments include purchases of coal, electricity, natural gas,
and nuclear fuel (see Note 11).(c)
    
    Future pension contributions are not determinable for time periods after 2007.(d)
    
    These contractual obligations include commitments for capital expenditures and other
obligations. 66




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
  67




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   PageManagements Report on Internal Control Over Financial Reporting (Pinnacle West Capital Corporation)
    
    
    69Report of Independent Registered Public Accounting Firm
    
    
    70Pinnacle West Consolidated Statements of Income for 2006, 2005 and 2004
    
    
    72Pinnacle West Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    73Pinnacle West Consolidated Statements of Cash Flows for 2006, 2005 and 2004
    
    
    75Pinnacle West Consolidated Statements of Changes in Common Stock Equity for 2006, 2005 and 2004
    
    
    76Notes to Pinnacle Wests Consolidated Financial Statements
    
    
    77Managements Report on Internal Control Over Financial Reporting (Arizona Public Service Company)
    
    
    127Report of Independent Registered Public Accounting Firm
    
    
    128APS Statements of Income for 2006, 2005 and 2004
    
    
    130APS Balance Sheets as of December 31, 2006 and 2005
    
    
    131APS Statements of Cash Flows for 2006, 2005 and 2004
    
    
    133APS Statements of Changes in Common Stock Equity for 2006, 2005 and 2004
    
    
    134Supplemental Notes to APS Financial Statements
    
    
    136Financial Statement Schedule for 2006, 2005 and 2004Pinnacle West Schedule I  Condensed Statement of Income for 2006, 2005 and 2004
    
    
    145Pinnacle West Schedule I  Condensed Balance Sheets as of December 31, 2006 and 2005
    
    
    146Pinnacle West Schedule I  Condensed Statement of Cash Flows for 2006, 2005 and 2004
    
    
    147Pinnacle
West Schedule II  Reserve for Uncollectibles for 2006, 2005
and 2004
    
    
    148APS
Schedule II  Reserve for Uncollectibles for 2006, 2005 and
2004
    
    
    149
  68




---



##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL
 OVER FINANCIAL REPORTING
 (PINNACLE WEST CAPITAL CORPORATION)
 Internal Control  Integrated Framework Internal Control  Integrated Framework,
  69




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
   70




---



##### Table of Contents



Internal
ControlIntegrated Framework Internal ControlIntegrated Framework
  
  71




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
  Year Ended December 31,2006
    
    
    2005
    
    
    2004OPERATING REVENUESRegulated electricity segment
    
    $
    2,635,036
    
    
    $
    2,237,145
    
    
    $
    2,035,247Real estate segment
    
    
    399,798
    
    
    
    338,031
    
    
    
    350,315Marketing and trading
    
    
    330,742
    
    
    
    351,558
    
    
    
    400,628Other revenues
    
    
    36,172
    
    
    
    61,221
    
    
    
    42,816Total
    
    
    3,401,748
    
    
    
    2,987,955
    
    
    
    2,829,006OPERATING EXPENSESRegulated electricity segment fuel and
purchased power
    
    
    960,649
    
    
    
    595,141
    
    
    
    567,433Real estate segment operations
    
    
    324,861
    
    
    
    278,366
    
    
    
    284,194Marketing and trading fuel and
purchased power
    
    
    290,637
    
    
    
    293,091
    
    
    
    320,667Operations and maintenance
    
    
    691,277
    
    
    
    635,827
    
    
    
    592,320Depreciation and amortization
    
    
    358,644
    
    
    
    347,652
    
    
    
    391,597Taxes other than income taxes
    
    
    128,395
    
    
    
    132,040
    
    
    
    120,722Other expenses
    
    
    28,415
    
    
    
    51,987
    
    
    
    34,108Regulatory disallowance (Note 3)
    
    
    
    
    
    
    138,562
    
    
    
    Total
    
    
    2,782,878
    
    
    
    2,472,666
    
    
    
    2,311,041OPERATING INCOME
    
    
    618,870
    
    
    
    515,289
    
    
    
    517,965OTHERAllowance for equity funds used during
construction
    
    
    14,312
    
    
    
    11,191
    
    
    
    4,885Other income (Note 19)
    
    
    44,016
    
    
    
    23,360
    
    
    
    53,289Other expense (Note 19)
    
    
    (27,800
    )
    
    
    (26,716
    )
    
    
    (21,340
    )Total
    
    
    30,528
    
    
    
    7,835
    
    
    
    36,834INTEREST EXPENSEInterest charges
    
    
    196,826
    
    
    
    185,087
    
    
    
    183,527Capitalized interest
    
    
    (20,989
    )
    
    
    (12,018
    )
    
    
    (11,460
    )Total
    
    
    175,837
    
    
    
    173,069
    
    
    
    172,067INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
    
    
    473,561
    
    
    
    350,055
    
    
    
    382,732INCOME TAXES
    
    
    156,418
    
    
    
    126,892
    
    
    
    136,142INCOME FROM CONTINUING OPERATIONS
    
    
    317,143
    
    
    
    223,163
    
    
    
    246,590INCOME (LOSS) FROM DISCONTINUED OPERATIONSNet of income tax expense (benefit)
of $6,570, ($29,797) and ($1,805)
    
    
    10,112
    
    
    
    (46,896
    )
    
    
    (3,395
    )NET INCOME
    
    $
    327,255
    
    
    $
    176,267
    
    
    $
    243,195WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING  BASIC
    
    
    99,417
    
    
    
    96,484
    
    
    
    91,397WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 
DILUTED
    
    
    100,010
    
    
    
    96,590
    
    
    
    91,532EARNINGS PER WEIGHTED  AVERAGE
COMMON SHARE OUTSTANDINGIncome from continuing operations  basic
    
    $
    3.19
    
    
    $
    2.31
    
    
    $
    2.70Net income  basic
    
    
    3.29
    
    
    
    1.83
    
    
    
    2.66Income from continuing operations  diluted
    
    
    3.17
    
    
    
    2.31
    
    
    
    2.69Net income  diluted
    
    
    3.27
    
    
    
    1.82
    
    
    
    2.66DIVIDENDS DECLARED PER SHARE
    
    $
    2.025
    
    
    $
    1.925
    
    
    $
    1.825
  72




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
  December 31,2006
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    87,210
    
    
    $
    154,003Investment in debt securities
    
    
    32,700
    
    
    
    Customer and other receivables
    
    
    501,628
    
    
    
    502,681Allowance for doubtful accounts
    
    
    (5,597
    )
    
    
    (4,979
    )Materials and supplies (at average cost)
    
    
    125,802
    
    
    
    109,736Fossil fuel (at average cost)
    
    
    21,973
    
    
    
    23,658Deferred income taxes (Note 4)
    
    
    982
    
    
    
    Assets from risk management and trading
activities (Note 18)
    
    
    641,040
    
    
    
    827,779Assets held for sale (Note 22)
    
    
    
    
    
    
    202,645Other current assets
    
    
    68,924
    
    
    
    75,869Total current assets
    
    
    1,474,662
    
    
    
    1,891,392INVESTMENTS AND OTHER ASSETSReal estate investments  net (Notes 1 and 6)
    
    
    526,008
    
    
    
    390,702Assets from long-term risk management and trading
activities (Note 18)
    
    
    167,211
    
    
    
    597,831Decommissioning trust accounts (Note 12)
    
    
    343,771
    
    
    
    293,943Other assets
    
    
    111,388
    
    
    
    111,931Total investments and other assets
    
    
    1,148,378
    
    
    
    1,394,407PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6,
9 and 10)Plant in service and held for future use
    
    
    11,154,919
    
    
    
    10,727,695Less accumulated depreciation and amortization
    
    
    3,797,475
    
    
    
    3,622,884Net
    
    
    7,357,444
    
    
    
    7,104,811Construction work in progress
    
    
    368,284
    
    
    
    327,172Intangible assets, net of accumulated amortization
of $218,836 and $182,576
    
    
    96,100
    
    
    
    90,916Nuclear fuel, net of accumulated amortization of
$50,741 and $53,984
    
    
    60,100
    
    
    
    54,184Total property, plant and equipment
    
    
    7,881,928
    
    
    
    7,577,083DEFERRED DEBITSDeferred fuel and purchased power regulatory asset
(Notes 1, 3 and 4)
    
    
    160,268
    
    
    
    172,756Other regulatory assets (Notes 1, 3 and 4)
    
    
    686,016
    
    
    
    151,123Other deferred debits
    
    
    104,691
    
    
    
    135,884Total deferred debits
    
    
    950,975
    
    
    
    459,763TOTAL ASSETS
    
    $
    11,455,943
    
    
    $
    11,322,645
  73




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
 December 31,2006
    
    
    2005LIABILITIES AND COMMON STOCK EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    346,047
    
    
    $
    377,107Accrued taxes
    
    
    263,935
    
    
    
    289,235Accrued interest
    
    
    48,746
    
    
    
    31,774Short-term borrowings (Note 5)
    
    
    35,750
    
    
    
    15,673Current maturities of long-term debt (Note 6)
    
    
    1,596
    
    
    
    384,947Customer deposits
    
    
    70,168
    
    
    
    60,509Deferred income taxes (Note 4)
    
    
    
    
    
    
    94,710Liabilities from risk management and trading
activities (Note 18)
    
    
    558,195
    
    
    
    720,693Other current liabilities
    
    
    134,123
    
    
    
    297,425Total current liabilities
    
    
    1,458,560
    
    
    
    2,272,073LONG-TERM DEBT LESS CURRENT MATURITIES
(Note 6)
    
    
    3,232,633
    
    
    
    2,608,455DEFERRED CREDITS AND OTHERDeferred income taxes (Note 4)
    
    
    1,225,798
    
    
    
    1,225,253Regulatory liabilities (Notes 1, 3 and 4)
    
    
    635,431
    
    
    
    592,494Liability for asset retirements (Note 12)
    
    
    268,389
    
    
    
    269,011Liabilities for pension and other postretirement
benefits (Note 8)
    
    
    588,852
    
    
    
    264,476Liabilities from risk management and trading
activities (Note 18)
    
    
    171,170
    
    
    
    256,413Unamortized gain  sale of utility plant (Note 9)
    
    
    41,182
    
    
    
    45,757Other
    
    
    387,812
    
    
    
    363,749Total deferred credits and other
    
    
    3,318,634
    
    
    
    3,017,153COMMITMENTS AND CONTINGENCIES (Notes 3, 11,
12 and 21)COMMON STOCK EQUITY (Note 7)Common stock, no par value; authorized
150,000,000 shares; issued 99,961,066 at
end of 2006 and 99,077,133 at end of 2005
    
    
    2,114,550
    
    
    
    2,067,377Treasury stock at cost; 2,419 shares at end of
2006 and 20,058 shares at end of 2005
    
    
    (449
    )
    
    
    (1,245
    )Total common stock
    
    
    2,114,101
    
    
    
    2,066,132Accumulated other comprehensive income (loss):Pension and other postretirement
benefits (Note 8)
    
    
    (19,263
    )
    
    
    (97,277
    )Derivative instruments
    
    
    31,531
    
    
    
    262,397Total accumulated other comprehensive income
    
    
    12,268
    
    
    
    165,120Retained earnings
    
    
    1,319,747
    
    
    
    1,193,712Total common stock equity
    
    
    3,446,116
    
    
    
    3,424,964TOTAL LIABILITIES AND COMMON STOCK EQUITY
    
    $
    11,455,943
    
    
    $
    11,322,645
  74




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended December 31,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet Income
    
    $
    327,255
    
    
    $
    176,267
    
    
    $
    243,195Adjustments to reconcile net income to net cash provided by
operating activities:Silverhawk impairment loss
    
    
    
    
    
    
    91,025
    
    
    
    Regulatory disallowance
    
    
    
    
    
    
    138,562
    
    
    
    Equity earnings in Phoenix Suns partnership
    
    
    
    
    
    
    
    
    
    
    (34,594
    )Depreciation and amortization including nuclear fuel
    
    
    386,760
    
    
    
    381,604
    
    
    
    432,161Deferred fuel and purchased power
    
    
    (252,849
    )
    
    
    (172,756
    )
    
    
    Deferred fuel and purchased power amortization
    
    
    265,337
    
    
    
    
    
    
    
    Allowance for equity funds used during construction
    
    
    (14,312
    )
    
    
    (11,191
    )
    
    
    (4,885
    )Deferred income taxes
    
    
    27,738
    
    
    
    (23,806
    )
    
    
    (113,850
    )Change in mark-to-market valuations
    
    
    28,464
    
    
    
    (11,670
    )
    
    
    (18,915
    )Changes in current assets and liabilities:Customer and other receivables
    
    
    9,189
    
    
    
    (38,763
    )
    
    
    (11,056
    )Materials, supplies and fossil fuel
    
    
    (9,094
    )
    
    
    (16,836
    )
    
    
    2,621Other current assets
    
    
    10,673
    
    
    
    (28,215
    )
    
    
    25,380Accounts payable
    
    
    (46,055
    )
    
    
    (6,392
    )
    
    
    85,344Accrued taxes
    
    
    (22,329
    )
    
    
    43,624
    
    
    
    175,842Other current liabilities
    
    
    21,763
    
    
    
    1,567
    
    
    
    10,561Proceeds from the sale of real estate assets
    
    
    34,990
    
    
    
    16,218
    
    
    
    80,035Real estate investments
    
    
    (126,229
    )
    
    
    (88,055
    )
    
    
    (62,812
    )Change in risk management and trading  liabilities
    
    
    (133,197
    )
    
    
    110,393
    
    
    
    13,018Collateral
    
    
    (165,828
    )
    
    
    192,040
    
    
    
    12,619Change in pension and other postretirement liabilities
    
    
    7,488
    
    
    
    3,116
    
    
    
    23,822Change in other long-term assets
    
    
    20,330
    
    
    
    (97,893
    )
    
    
    (39,215
    )Change in other long-term liabilities
    
    
    23,408
    
    
    
    71,457
    
    
    
    31,621Net cash flow provided by operating activities
    
    
    393,502
    
    
    
    730,296
    
    
    
    850,892CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (737,779
    )
    
    
    (633,532
    )
    
    
    (538,842
    )Capitalized interest
    
    
    (20,990
    )
    
    
    (12,018
    )
    
    
    (16,311
    )Purchase of Sundance Plant
    
    
    
    
    
    
    (185,046
    )
    
    
    Proceeds from the sale of Silverhawk
    
    
    207,620
    
    
    
    
    
    
    
    90,967Proceeds from the sale of the Phoenix Suns partnership
    
    
    
    
    
    
    
    
    
    
    23,101Purchases of investment securities
    
    
    (1,439,404
    )
    
    
    (2,962,278
    )
    
    
    (1,040,955
    )Proceeds from sale of investment securities
    
    
    1,406,704
    
    
    
    3,143,481
    
    
    
    951,630Proceeds from nuclear decommissioning trust sales
    
    
    254,651
    
    
    
    186,215
    
    
    
    123,795Investment in nuclear decommissioning trust
    
    
    (275,393
    )
    
    
    (204,633
    )
    
    
    (135,239
    )Proceeds from sale of real estate investments
    
    
    39,621
    
    
    
    82,719
    
    
    
    Other
    
    
    (3,763
    )
    
    
    
    
    
    
    (3,072
    )Net cash flow used for investing activities
    
    
    (568,733
    )
    
    
    (585,092
    )
    
    
    (544,926
    )CASH FLOWS FROM FINANCING ACTIVITIESIssuance of long-term debt
    
    
    757,636
    
    
    
    1,088,815
    
    
    
    478,328Repayment of long-term debt
    
    
    (527,864
    )
    
    
    (1,288,034
    )
    
    
    (604,015
    )Short-term borrowings and payments  net
    
    
    9,911
    
    
    
    (46,413
    )
    
    
    (15,051
    )Dividends paid on common stock
    
    
    (201,220
    )
    
    
    (186,677
    )
    
    
    (166,772
    )Common stock equity issuance
    
    
    39,548
    
    
    
    298,168
    
    
    
    18,291Other
    
    
    30,427
    
    
    
    (20,426
    )
    
    
    9,690Net cash flow provided by (used for) financing activities
    
    
    108,438
    
    
    
    (154,567
    )
    
    
    (279,529
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (66,793
    )
    
    
    (9,363
    )
    
    
    26,437CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
    
    
    154,003
    
    
    
    163,366
    
    
    
    136,929CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    87,210
    
    
    $
    154,003
    
    
    $
    163,366Supplemental disclosure of cash flow informationCash paid during the period for:Income taxes paid, net of refunds
    
    $
    157,245
    
    
    $
    86,711
    
    
    $
    66,447Interest paid, net of amounts capitalized
    
    $
    153,503
    
    
    $
    181,975
    
    
    $
    191,865
  75




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
  Year Ended December 31,2006
    
    
    2005
    
    
    2004COMMON STOCK (Note 7)Balance at beginning of year
    
    $
    2,067,377
    
    
    $
    1,769,047
    
    
    $
    1,744,354Issuance of common stock
    
    
    39,420
    
    
    
    298,330
    
    
    
    18,291Other
    
    
    7,753
    
    
    
    
    
    
    
    6,402Balance at end of year
    
    
    2,114,550
    
    
    
    2,067,377
    
    
    
    1,769,047TREASURY STOCK (Note 7)Balance at beginning of year
    
    
    (1,245
    )
    
    
    (428
    )
    
    
    (3,273
    )Purchase of treasury stock
    
    
    (229
    )
    
    
    (1,601
    )
    
    
    (2,986
    )Reissuance of treasury stock used for stock
compensation, net
    
    
    1,025
    
    
    
    784
    
    
    
    5,831Balance at end of year
    
    
    (449
    )
    
    
    (1,245
    )
    
    
    (428
    )RETAINED EARNINGSBalance at beginning of year
    
    
    1,193,712
    
    
    
    1,204,122
    
    
    
    1,127,699Net income
    
    
    327,255
    
    
    
    176,267
    
    
    
    243,195Common stock dividends
    
    
    (201,220
    )
    
    
    (186,677
    )
    
    
    (166,772
    )Balance at end of year
    
    
    1,319,747
    
    
    
    1,193,712
    
    
    
    1,204,122ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)Balance at beginning of year
    
    
    165,120
    
    
    
    (22,545
    )
    
    
    (39,001
    )Unrealized gain (loss) on derivative
instruments, net of tax expense (benefit)
of ($137,606), $179,927 and $31,117
    
    
    (214,777
    )
    
    
    281,019
    
    
    
    48,226Reclassification of realized gain to
income, net of tax benefit of ($10,308),
($50,056) and ($10,695)
    
    
    (16,089
    )
    
    
    (77,865
    )
    
    
    (16,546
    )Minimum pension liability adjustment, net of
tax expense (benefit) of $28,245, ($9,526)
and ($9,756)
    
    
    44,086
    
    
    
    (15,489
    )
    
    
    (15,224
    )Adjustment to reflect a change in accounting
for pension and other postretirement benefits,
net of tax expense of $22,412 (Note 8)
    
    
    33,928
    
    
    
    
    
    
    
    Balance at end of year
    
    
    12,268
    
    
    
    165,120
    
    
    
    (22,545
    )TOTAL COMMON STOCK EQUITY
    
    $
    3,446,116
    
    
    $
    3,424,964
    
    
    $
    2,950,196COMPREHENSIVE INCOMENet income
    
    $
    327,255
    
    
    $
    176,267
    
    
    $
    243,195Other comprehensive income (loss)
    
    
    (186,780
    )
    
    
    187,665
    
    
    
    16,456Comprehensive income
    
    $
    140,475
    
    
    $
    363,932
    
    
    $
    259,651
  76




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
 
 NOTES TO CONSOLIDATES FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Consolidation and Nature of Operations
   Accounting Records and Use of Estimates
  Derivative Accounting
   77




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          78




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Regulatory Accounting
     December 31,2006
    
    
    2005Pension and other postretirement benefits (Note 8)
    
    $
    473
    
    
    $
    Deferred fuel and purchased power (a) (Note 3)
    
    
    160
    
    
    
    173Deferred fuel and purchased power  mark-to-market
    
    
    62
    
    
    
    Competition rules compliance charge (a)
    
    
    34
    
    
    
    42Deferred compensation
    
    
    28
    
    
    
    25Regulatory asset for deferred income taxes
    
    
    27
    
    
    
    19Loss on reacquired debt (b)
    
    
    17
    
    
    
    18Other
    
    
    45
    
    
    
    47Total regulatory assets
    
    $
    846
    
    
    $
    324
 
 (a)
    
    Subject to a carrying charge.(b)
    
    See Reacquired Debt Costs below.  79




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31,2006
    
    
    2005Removal costs (a)
    
    $
    387
    
    
    $
    385Regulatory liability related to asset retirement
obligations
    
    
    133
    
    
    
    101Tax benefit of Medicare subsidy
    
    
    46
    
    
    
    Deferred fuel and purchased power 
mark-to-market
    
    
    
    
    
    
    31Regulatory liability for deferred income taxes
    
    
    15
    
    
    
    24Deferred interest income (b)
    
    
    18
    
    
    
    22Deferred
gains on utility property (b)
    
    
    20
    
    
    
    20Other
    
    
    16
    
    
    
    9Total regulatory liabilities
    
    $
    635
    
    
    $
    592
 
 (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;
    
    construction overhead costs (where applicable); and
    
    capitalized interest or an allowance for funds used during construction.
    80




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    
    Fossil plant  19 years;
    
    Nuclear plant  18 years;
    
    Other generation  28 years;
    
    Transmission  40 years;
    
    Distribution  28 years; and
    
    Other  6 years.
  Investments
   Capitalized Interest
  Allowance for Funds Used During Construction
   Electric Revenues
  81




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Real Estate Revenues
  Real Estate Investments
  Cash and Cash Equivalents
  82




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Nuclear Fuel
   Income Taxes
  Reacquired Debt Costs
  Stock-Based Compensation
   Intangible Assets and Emission Allowance Inventory
  83




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   2. New Accounting Standards
     
    
    See Note 8 and Note S-6 for a discussion of SFAS No. 158 on pension and other postretirement
plans.
    
    See Note 16 for a discussion of the accounting standard (SFAS No. 123(R)) on
stock-based compensation.
 3. Regulatory Matters
 APS General Rate Case
  84




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 AnnualRevenue
    
    
    PercentageIncrease
    
    
    IncreaseIncreased fuel and purchased power
    
    $
    314.4
    
    
    
    14.8
    %Capital structure update
    
    
    98.3
    
    
    
    4.6
    %Rate base update, including acquisition of
Sundance Plant
    
    
    46.2
    
    
    
    2.2
    %Pension funding
    
    
    41.3
    
    
    
    1.9
    %Other items
    
    
    (65.6
    )
    
    
    (3.1
    )%Total increase
    
    $
    434.6
    
    
    
    20.4
    %
   
    
    Allowing accelerated depreciation to address the large imbalance between
APS capital expenditures (estimated to average more than $900 million per year from
2007 through 2009) and its recovery of those expenses (in discussing this measure, APS
assumed an increase of $50 million per year in allowed depreciation expense, which
would increase APS revenue requirement by that same amount );
    
    Placing generation and distribution construction work in progress
(CWIP) in rate base (in discussing this measure, APS assumed the inclusion of its
June 30, 2006 CWIP balance of $261 million in rate base, which would increase APS
revenue requirement by about $33 million); and
    
    Approving an attrition adjustment to provide APS a reasonable
opportunity to earn an authorized return on equity given overall cost increases and
higher levels of construction needed to accommodate ongoing customer growth (APS
suggested a minimum attrition adjustment that would increase the allowed return on
equity by 1.7% to 4.1%).
  85




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 APS (a)
    
    
    ACC Staff (b)
    
    
    RUCO (b)Annual
    
    
    
    
    
    
    Annual
    
    
    
    
    
    
    AnnualRevenue
    
    
    Percentage
    
    
    Revenue
    
    
    Percentage
    
    
    Revenue
    
    
    PercentageIncrease
    
    
    Increase
    
    
    Increase
    
    
    Increase
    
    
    Increase
    
    
    IncomeAnnual revenue increase
(decrease)Increased fuel and
purchased power
    
    $
    314.4
    
    
    
    14.8
    %
    
    $
    193.5
    
    
    
    9.2
    %
    
    $
    280.0
    
    
    
    13.2
    %Non-fuel components
    
    
    120.2
    
    
    
    5.6
    %
    
    
    (1.0
    )
    
    
    (0.1
    )%
    
    
    (68.0
    )
    
    
    (3.2
    )%Total
    
    $
    434.6
    
    
    
    20.4
    %
    
    $
    192.5
    
    
    
    9.1
    %
    
    $
    212.0
    
    
    
    10.0
    %Base fuel rate (¢kWh)
    
    
    3.25
    ¢
    
    
    
    
    
    
    2.80
    ¢
    
    
    
    
    
    
    3.12
    ¢Return on equity
    
    
    11.5
    %
    
    
    
    
    
    
    10.25
    %
    
    
    
    
    
    
    9.25
    %Capital structureLong-term debt
    
    
    45
    %
    
    
    
    
    
    
    45
    %
    
    
    
    
    
    
    50
    %Common equity
    
    
    55
    %
    
    
    
    
    
    
    55
    %
    
    
    
    
    
    
    50
    %Rate base
    
    $4.5 billion
    
    
    
    
    
    $4.5 billion
    
    
    
    
    
    $4.5 billionTest year ended
    
    
    9/30/2005
    
    
    
    
    
    
    
    9/30/2005
    
    
    
    
    
    
    
    9/30/2005
 
 (a)
    
    APS rejoinder testimony (10/4/06).(b)
    
    Final position per post-hearing brief and/or final schedules (1/22/07). The ACC staff
has also recommended that the ACC establish minimum three-year capacity factor targets for
Palo Verde based on a three-year average of Palo Verde performance as compared to a group
of comparable nuclear plants, with the ACC to review the recovery of any incremental fuel
and replacement power costs attributable to Palo Verde not meeting the minimum targets.  Interim Rate Increase
  
    
    authorized an interim PSA adjustor, effective May 1, 2006, that resulted in an
interim retail rate increase of approximately 8.3% designed to recover approximately
$138 million of fuel and purchased power costs incurred in 2006 (this interim adjustor,
combined with the $15 million PSA surcharge approved by the ACC (see Surcharge for
Certain 2005 PSA Deferrals below), resulted in a rate increase of
 86




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 approximately 9.0% designed to recover approximately $149 million of fuel and
purchased power costs during 2006);
    
    provided that amounts collected through the interim PSA adjustor remain subject to
a prudency review at the appropriate time and that all unplanned Palo Verde outage
costs for 2006 should undergo a prudence audit by [the ACC] Staff (see PSA Deferrals
Related to Unplanned Palo Verde Outages below);
    
    encouraged parties to APS general rate case to propose modifications to the PSA
that will address on a permanent basis, the issues with timing of recovery when
deferrals are large and growing;
    
    affirmed APS ability to defer fuel and purchased power costs above the prior annual
cap of $776.2 million until the ACC decides the general rate case; and
    
    encouraged APS to diversify its resources through large scale, sustained energy
efficiency programs, [using] low cost renewable energy resources as a hedge against
high fossil fuel costs.
  Power Supply Adjustor
 PSA Provisions
  
    
    APS records deferrals for recovery or refund to the extent actual retail fuel and
purchased power costs vary from the base fuel amount (currently $0.020743 per kWh);
    
    the deferrals are subject to a 90/10 sharing arrangement in which APS must absorb
10% of the retail fuel and purchased power costs above the base fuel amount and may
retain 10% of the benefit from the retail fuel and purchased power costs that are below
the base fuel amount;
    
    amounts to be recovered or refunded through the PSA adjustor are limited to (a) a
cumulative plus or minus $0.004 per kWh from the base fuel amount over the life of the
PSA and (b) a maximum plus or minus $0.004 change in the adjustor rate in any one year;
    
    the recoverable amount of annual retail fuel and purchased power costs through
current base rates and the PSA was originally capped at $776.2 million; however, the
 87




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 ACC has removed the cap pending the ACCs final ruling on APS pending request in
the general rate case to have the cap eliminated or substantially raised;
    
    the adjustment is made annually each February 1st and goes into effect
automatically unless suspended by the ACC;
    
    the PSA will remain in effect for a minimum five-year period, but the ACC may
eliminate the PSA at any time, if appropriate, in the event APS files a rate case
before the expiration of the five-year period (which APS did by filing the general rate
case noted above) or if APS does not comply with the terms of the PSA; and
    
    APS is prohibited from requesting PSA surcharges until after the PSA annual adjustor
rate has been set each year. The amount available for potential PSA surcharges will be
limited to the amount of accumulated deferrals through the prior year-end, which are
not expected to be recovered through the annual adjustor or any PSA surcharges
previously approved by the ACC.
 2007 PSA Annual Adjustor
 Surcharge for Certain 2005 PSA Deferrals
 PSA Deferrals Related to Unplanned Palo Verde Outages
 
    
    Three of the outages were due to faulty or defective vendor supplied equipment and
concludes that APS actions were not imprudent in connection with these outages. The
report recommends, however, that the ACC evaluate the degree to which APS has sought
appropriate legal or other remedies in connection with these outages and that APS be
given the opportunity to demonstrate the steps that it has taken in this regard.
 88




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
    
    Additional investigation will be needed to determine the cause of and
responsibility for the Palo Verde Unit 1 outage resulting from vibration levels in one
of the Units shutdown cooling lines.
    Proposed Modifications to PSA (Requested In General Rate Case)
  
    
    The cumulative plus or minus $0.004 per kWh limit from the base fuel amount over the
life of the PSA would be eliminated, while the maximum plus or minus $0.004 per kWh
limit to changes in the adjustor rate in any one year would remain in effect;
    
    The $776.2 million annual limit on the retail fuel and purchased power costs under
APS current base rates and the PSA would be removed or increased (although APS may
defer fuel and purchased power costs above $776.2 million per year pending the ACCs
final ruling on APS pending request to have the cap eliminated or substantially
raised);
    
    The current provision that APS is required to file a surcharge application with the
ACC after accumulated pretax PSA deferrals equal $50 million and before they equal $100
million would be eliminated, thereby giving APS flexibility in determining when a
surcharge filing should be made; and
    
    The costs of renewable energy and capacity costs attributable to purchased power
obtained through competitive procurement would be excluded from the existing 90/10
sharing arrangement under which APS absorbs 10% of the retail fuel and purchased power
costs above the base fuel amount and retains 10% of the benefit from retail fuel and
purchased power costs that are below the base fuel amount.
 89




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
    
    Establishing the PSA annual adjustor, beginning in 2007, based on projected fuel
costs rather than historical fuel costs; and
    
    Removing all existing limitations on fuel cost recovery, including the 90/10 sharing
arrangement.
  2006
    
    
    2005Deferred fuel and purchased power
regulatory asset-beginning balance
    
    $
    173
    
    
    $
    Deferred fuel and purchase power
costs-current period
    
    
    244
    
    
    
    171Interest on deferred fuel
    
    
    8
    
    
    
    2Amounts recovered through revenues
    
    
    (265
    )
    
    
    Deferred fuel and purchase power
regulatory asset-ending balance
    
    $
    160
    
    
    $
    173
 Equity Infusions
  Federal
  4. Income Taxes
   90




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Year Ended December 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    110,029
    
    
    $
    107,837
    
    
    $
    200,133State
    
    
    21,507
    
    
    
    13,064
    
    
    
    48,054Total current
    
    
    131,536
    
    
    
    120,901
    
    
    
    248,187Deferred:Income from continuing operations
    
    
    31,452
    
    
    
    11,930
    
    
    
    (113,850
    )Discontinued operations
    
    
    
    
    
    
    (35,736
    )
    
    
    Total deferred
    
    
    31,452
    
    
    
    (23,806
    )
    
    
    (113,850
    )Total income tax expense
    
    
    162,988
    
    
    
    97,095
    
    
    
    134,337Less: income tax expense (benefit) on
discontinued operations
    
    
    6,570
    
    
    
    (29,797
    )
    
    
    (1,805
    )Income tax expense  continuing operations
    
    $
    156,418
    
    
    $
    126,892
    
    
    $
    136,142
 91




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Federal income tax expense at 35%
statutory rate
    
    $
    165,746
    
    
    $
    122,519
    
    
    $
    133,956Increases (reductions) in tax expense
resulting from:State income tax net of federal income
tax benefit
    
    
    17,309
    
    
    
    11,981
    
    
    
    14,460Credits and favorable adjustments
related to prior years resolved in
current year
    
    
    (14,028
    )
    
    
    
    
    
    
    (6,138
    )Medicare Subsidy Part-D
    
    
    (3,156
    )
    
    
    (2,733
    )
    
    
    (1,778
    )Allowance for equity funds used during
construction (see Note 1)
    
    
    (4,679
    )
    
    
    (3,694
    )
    
    
    (1,547
    )Other
    
    
    (4,774
    )
    
    
    (1,181
    )
    
    
    (2,811
    )Income tax expense  continuing operations
    
    $
    156,418
    
    
    $
    126,892
    
    
    $
    136,142
  December 31,2006
    
    
    2005Current asset
    
    $
    982
    
    
    $
    Current liability
    
    
    
    
    
    
    (94,710
    )Long-term liability
    
    
    (1,225,798
    )
    
    
    (1,225,253
    )Accumulated deferred income taxes  net
    
    $
    (1,224,816
    )
    
    $
    (1,319,963
    )
 92




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,2006
    
    
    2005DEFERRED TAX ASSETSRisk management and trading activities
    
    $
    280,152
    
    
    $
    323,696Regulatory liabilities:Asset retirement obligation
    
    
    203,846
    
    
    
    189,726Federal excess deferred income taxes
    
    
    12,714
    
    
    
    14,446Deferred fuel and purchased power 
mark-to-market
    
    
    
    
    
    
    11,923Tax benefit of Medicare subsidy
    
    
    18,214
    
    
    
    Other
    
    
    27,283
    
    
    
    29,720Pension and other postretirement liabilities
    
    
    272,484
    
    
    
    83,753Deferred gain on Palo Verde Unit 2 sale
leaseback
    
    
    16,160
    
    
    
    17,868Other
    
    
    73,811
    
    
    
    91,015Total deferred tax assets
    
    
    904,664
    
    
    
    762,147DEFERRED TAX LIABILITIESPlant-related
    
    
    (1,509,812
    )
    
    
    (1,426,158
    )Risk management and trading activities
    
    
    (285,961
    )
    
    
    (524,940
    )Regulatory assets:Deferred fuel and purchased power
    
    
    (62,889
    )
    
    
    (67,461
    )Deferred fuel and purchased power 
mark-to-market
    
    
    (24,427
    )
    
    
    Pension and other postretirement
benefits
    
    
    (185,602
    )
    
    
    Other
    
    
    (60,789
    )
    
    
    (63,551
    )Total deferred tax liabilities
    
    
    (2,129,480
    )
    
    
    (2,082,110
    )Accumulated deferred income taxes  net
    
    $
    (1,224,816
    )
    
    $
    (1,319,963
    )
 5. Lines of Credit and Short-Term Borrowings
  93




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    6. Long-Term Debt
  94




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31,Maturity
    
    
    InterestDates (a)
    
    
    Rates
    
    
    2006
    
    
    2005APSPollution control bonds
    
    
    2024-2034
    
    
    
    (b
    )
    
    $
    565,855
    
    
    $
    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
    
    
    
    300,000Secured note
    
    
    2014
    
    
    
    6.00
    %
    
    
    1,592
    
    
    
    1,745Senior notes (c)
    
    
    2006
    
    
    
    6.75
    %
    
    
    
    
    
    
    83,695Senior notes
    
    
    2035
    
    
    
    5.50
    %
    
    
    250,000
    
    
    
    250,000Senior notes (c)
    
    
    2016
    
    
    
    6.25
    %
    
    
    250,000
    
    
    
    Senior notes (c)
    
    
    2036
    
    
    
    6.875
    %
    
    
    150,000
    
    
    
    Unamortized discount and premium
    
    
    
    
    
    
    
    
    
    
    (9,857
    )
    
    
    (9,151
    )Capitalized lease obligations
    
    
    2009-2012
    
    
    
    (d
    )
    
    
    5,880
    
    
    
    8,179Subtotal (e)
    
    
    
    
    
    
    
    
    
    
    2,878,470
    
    
    
    2,565,323SUNCORNotes payable
    
    
    2008
    
    
    
    (f
    )
    
    
    180,316
    
    
    
    129,040Capitalized lease obligations
    
    
    2007-2010
    
    
    
    6.25
    %
    
    
    328
    
    
    
    266Subtotal
    
    
    
    
    
    
    
    
    
    
    180,644
    
    
    
    129,306PINNACLE WESTSenior notes (g)
    
    
    2006
    
    
    
    6.40
    %
    
    
    
    
    
    
    298,518Senior notes (h)
    
    
    2011
    
    
    
    5.91
    %
    
    
    175,000
    
    
    
    Unamortized discount and premium
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )Capitalized lease obligations
    
    
    2007
    
    
    
    5.45
    %
    
    
    115
    
    
    
    284Subtotal
    
    
    
    
    
    
    
    
    
    
    175,115
    
    
    
    298,773Total long-term debt
    
    
    
    
    
    
    
    
    
    
    3,234,229
    
    
    
    2,993,402Less current maturities
    
    
    
    
    
    
    
    
    
    
    1,596
    
    
    
    384,947TOTAL LONG-TERM DEBT LESS CURRENT
MATURITIES
    
    
    
    
    
    
    
    
    
    $
    3,232,633
    
    
    $
    2,608,455
 
 (a)
    
    This schedule does not reflect the timing of redemptions that may occur prior to
maturity.(b)
    
    The weighted-average rate was 3.77% at December 31, 2006 and 3.25% at December 31, 2005.
Changes in short-term interest rates would affect the costs associated with this debt.(c)
    
    On August 3, 2006, APS issued $250 million 6.25% notes due 2016 and $150 million 6.875% notes
due 2036. A portion of the proceeds was used to repay outstanding commercial paper balances
and $84 million of its 6.75% senior note that matured November 15, 2006. The remainder may be
used to fund its construction program and other general corporate purposes.(d)
    
    The weighted-average interest rate was 6.20% at December 31, 2006 and 5.81% at December 31,
2005. Capital leases are included in property, plant and equipment on the Consolidated
Balance Sheets.(e)
    
    APS long-term debt less current maturities was $2.878 billion at December 31, 2006 and $2.48
billion at December 31, 2005. APS current maturities of long-term debt were $1 million at
December 31, 2006 and $86 million at December 31, 2005. 
 95




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (f)
    
    SunCor had $118 million outstanding at December 31, 2006 under its revolving line of credit.
The weighted-average interest rate was 7.08% at December 31, 2006. The remaining amount of
approximately $62 million at December 31, 2006 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 2.25%.
There is also a note at a fixed rate of 4.25%. SunCor had $123 million outstanding at
December 31, 2005 under its revolving line of credit. The weighted-average interest rate was
5.93% at December 31, 2005. The remaining amount of approximately $6 million at December 31,
2005 was made up of multiple notes with variable interest rates based on the lenders prime
rates plus 0.25% or LIBOR plus 2.00%.
 (g)
    
    On April 3, 2006 Pinnacle West repaid $300 million of its 6.40% senior notes. Pinnacle West
used proceeds from the issuance of its $175 million 5.91% senior notes issued on February 28,
2006, and commercial paper to repay the notes.
 (h)
    
    On February 28, 2006, Pinnacle West entered into a $200 million Senior Notes Uncommitted
Master Shelf Agreement with Prudential Investment Management Inc. (Prudential). Under the
terms of the agreement, Pinnacle West may offer up to $200 million of its senior notes for
purchase by Prudential at any time prior to December 31, 2007. The maturity of the notes
cannot exceed five years. On February 28, 2006, Pinnacle West issued $175 million of its
5.91% senior notes, series A, to Prudential. A portion of the proceeds was used to repay its
$300 million debt (see note f).
    96




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year
    
    Pinnacle West
    
    
    APS2007
    
    $
    2
    
    
    $
    12008
    
    
    169
    
    
    
    12009
    
    
    8
    
    
    
    12010
    
    
    229
    
    
    
    2242011
    
    
    576
    
    
    
    401Thereafter
    
    
    2,260
    
    
    
    2,260Total
    
    $
    3,244
    
    
    $
    2,888
 7. Common Stock and Treasury Stock
  Common Stock
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance at December 31, 2003
    
    
    91,379,947
    
    
    $
    1,744,354
    
    
    
    (92,015
    )
    
    $
    (3,273
    )Common stock issuance
    
    
    422,914
    
    
    
    18,291
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (80,000
    )
    
    
    (2,986
    )Reissuance of treasury stock
for stock compensation
(net)
    
    
    
    
    
    
    
    
    
    
    162,493
    
    
    
    5,831Other
    
    
    
    
    
    
    6,402
    
    
    
    
    
    
    
    Balance at December 31, 2004
    
    
    91,802,861
    
    
    
    1,769,047
    
    
    
    (9,522
    )
    
    
    (428
    )Common stock issuance (a)
    
    
    7,274,272
    
    
    
    298,330
    
    
    
    
    
    
    
    Purchase of treasury stock
(b)
    
    
    
    
    
    
    
    
    
    
    (28,124
    )
    
    
    (1,601
    )Reissuance of treasury stock
for stock compensation
(net)
    
    
    
    
    
    
    
    
    
    
    17,588
    
    
    
    784Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2005
    
    
    99,077,133
    
    
    
    2,067,377
    
    
    
    (20,058
    )
    
    
    (1,245
    )Common stock issuance
    
    
    883,933
    
    
    
    39,420
    
    
    
    
    
    
    
    Purchase of treasury stock
(b)
    
    
    
    
    
    
    
    
    
    
    (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
    )
 
 (a)
    
    On May 2, 2005, Pinnacle West issued 6,095,000 shares of its common stock at an
offering price of $42 per share, resulting in net proceeds of approximately $248
million. Pinnacle West used the net proceeds for general corporate purposes, including
making capital contributions to APS, which, in turn, used such funds to pay a portion
of the approximately $190 million purchase price to acquire the Sundance Plant and for
other capital expenditures incurred to meet the growing needs of APS service
territory. 97




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (b)
    
    Represents shares of common stock withheld from certain stock awards for tax
purposes.
 8. Retirement Plans and Other Benefits
     PensionIncremental Effect of Adopting
    
    Balances
    
    Adoption of
    
    Regulatory
    
    BalanceSFAS No. 158 as of
    
    Before
    
    SFAS No.
    
    Accounting
    
    AfterDecember 31, 2006
    
    Adoption
    
    158
    
    Adjustments
    
    AdoptionAssets:Intangible asset
    
    $
    12,932
    
    
    $
    (12,932
    )
    
    $
    
    
    
    $
    Regulatory asset
    
    
    
    
    
    
    
    
    
    
    318,461
    
    
    
    318,461Liabilities:Current benefit liability
    
    
    
    
    
    
    (3,540
    )
    
    
    
    
    
    
    (3,540
    )Accumulated deferred income taxes -
current
    
    
    
    
    
    
    1,382
    
    
    
    
    
    
    
    1,382Noncurrent benefit liability
    
    
    (212,262
    )
    
    
    (240,243
    )
    
    
    
    
    
    
    (452,505
    )Accumulated deferred income taxes 
long-term
    
    
    77,838
    
    
    
    98,865
    
    
    
    (124,359
    )
    
    
    52,344Common Stock Equity:Accumulated other comprehensive loss
    
    
    53,192
    
    
    
    156,468
    
    
    
    (194,102
    )
    
    
    15,558
 98




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Other BenefitsIncremental Effect of Adopting
    
    Balances
    
    Adoption of
    
    Regulatory
    
    BalanceSFAS No. 158 as of
    
    Before
    
    SFAS No.
    
    Accounting
    
    AfterDecember 31, 2006
    
    Adoption
    
    158
    
    Adjustments
    
    AdoptionAssets:Noncurrent benefit asset
    
    $
    23,589
    
    
    $
    (23,589
    )
    
    $
    
    
    
    $
    Regulatory asset
    
    
    
    
    
    
    
    
    
    
    154,531
    
    
    
    154,531Liabilities:Noncurrent benefit liability
    
    
    
    
    
    
    (136,347
    )
    
    
    
    
    
    
    (136,347
    )Regulatory liability
    
    
    
    
    
    
    
    
    
    
    (46,417
    )
    
    
    (46,417
    )Accumulated deferred income taxes 
long-term
    
    
    3,263
    
    
    
    90,335
    
    
    
    (42,219
    )
    
    
    51,379Common Stock Equity:Accumulated other comprehensive loss
    
    
    
    
    
    
    69,601
    
    
    
    (65,895
    )
    
    
    3,706
  Pension
    
    
    Other Benefits2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004Service cost-benefits
earned during the
period
    
    $
    47,287
    
    
    $
    45,027
    
    
    $
    41,207
    
    
    $
    19,968
    
    
    $
    20,913
    
    
    $
    17,557Interest cost on benefit
obligation
    
    
    92,196
    
    
    
    87,189
    
    
    
    81,873
    
    
    
    34,653
    
    
    
    34,223
    
    
    
    29,488Expected return on plan
assets
    
    
    (95,912
    )
    
    
    (88,403
    )
    
    
    (78,790
    )
    
    
    (36,930
    )
    
    
    (30,471
    )
    
    
    (24,773
    )Amortization of:Transition
(asset) obligation
    
    
    (645
    )
    
    
    (3,227
    )
    
    
    (3,227
    )
    
    
    3,005
    
    
    
    3,005
    
    
    
    3,005Prior service
cost (credit)
    
    
    2,401
    
    
    
    2,401
    
    
    
    2,401
    
    
    
    (125
    )
    
    
    (125
    )
    
    
    (125
    )Net actuarial
loss
    
    
    23,366
    
    
    
    19,810
    
    
    
    17,946
    
    
    
    8,662
    
    
    
    9,243
    
    
    
    7,414Net periodic benefit cost
    
    $
    68,693
    
    
    $
    62,797
    
    
    $
    61,410
    
    
    $
    29,233
    
    
    $
    36,788
    
    
    $
    32,566Portion of cost charged to
expense
    
    $
    30,912
    
    
    $
    26,375
    
    
    $
    25,792
    
    
    $
    13,155
    
    
    $
    15,451
    
    
    $
    13,678APS share of costs charged to
expense
    
    $
    29,203
    
    
    $
    24,169
    
    
    $
    22,483
    
    
    $
    12,428
    
    
    $
    14,159
    
    
    $
    11,923
 99




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Pension
    
    
    Other Benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Change in Benefit ObligationBenefit obligation at January 1
    
    $
    1,596,068
    
    
    $
    1,454,244
    
    
    $
    585,678
    
    
    $
    536,213Service cost
    
    
    47,287
    
    
    
    45,027
    
    
    
    19,968
    
    
    
    20,913Interest cost
    
    
    92,196
    
    
    
    87,189
    
    
    
    34,653
    
    
    
    34,223Benefit payments
    
    
    (49,189
    )
    
    
    (46,109
    )
    
    
    (16,439
    )
    
    
    (16,962
    )Actuarial losses (gains)
    
    
    (19,588
    )
    
    
    55,717
    
    
    
    (6,875
    )
    
    
    11,291Plan amendments
    
    
    3,500
    
    
    
    
    
    
    
    
    
    
    
    Benefit obligation at December 31
    
    
    1,670,274
    
    
    
    1,596,068
    
    
    
    616,985
    
    
    
    585,678Change in Plan AssetsFair value of plan assets at
January 1
    
    
    1,064,848
    
    
    
    982,282
    
    
    
    416,174
    
    
    
    352,084Actual return on plan assets
    
    
    148,895
    
    
    
    73,298
    
    
    
    47,988
    
    
    
    27,302Employer contributions
    
    
    46,500
    
    
    
    52,700
    
    
    
    29,233
    
    
    
    36,788Benefit payments
    
    
    (46,014
    )
    
    
    (43,432
    )
    
    
    (12,757
    )
    
    
    Fair value of plan assets at
December 31
    
    
    1,214,229
    
    
    
    1,064,848
    
    
    
    480,638
    
    
    
    416,174Funded Status at December 31
    
    $
    (456,045
    )
    
    $
    (531,220
    )
    
    $
    (136,347
    )
    
    $
    (169,504
    )
  2006
    
    2005Projected benefit obligation
    
    $
    1,670,274
    
    
    $
    1,596,068Accumulated benefit obligation
    
    
    1,426,492
    
    
    
    1,329,324Fair value of plan assets
    
    
    1,214,229
    
    
    
    1,064,848
  Pension
    
    
    Other Benefits2006
    
    
    2005
    
    
    2006
    
    
    2005Current liability
    
    $
    (3,540
    )
    
    $
    
    
    
    $
    
    
    
    $
    Noncurrent (liability) asset
    
    
    (452,505
    )
    
    
    (264,476
    )
    
    
    (136,347
    )
    
    
    20,245Intangible asset
    
    
    
    
    
    
    11,833
    
    
    
    
    
    
    
    Accumulated other
comprehensive loss (pretax)
    
    
    
    
    
    
    159,602
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    (456,045
    )
    
    $
    (93,041
    )
    
    $
    (136,347
    )
    
    $
    20,245
 100




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  OtherPension
    
    
    Benefits2006
    
    
    2006Net actuarial loss
    
    $
    331,054
    
    
    $
    143,079Prior service cost (credit)
    
    
    12,932
    
    
    
    (1,171
    )Transition obligation
    
    
    
    
    
    
    18,029APS portion reclassified as a regulatory
asset
    
    
    (318,461
    )
    
    
    (154,531
    )Accumulated other comprehensive loss
(pretax)
    
    $
    25,525
    
    
    $
    5,406
  OtherPension
    
    
    BenefitsNet actuarial loss
    
    $
    14,939
    
    
    $
    6,173Prior service cost (credit)
    
    
    2,715
    
    
    
    (125
    )Transition obligation
    
    
    
    
    
    
    3,005Total amount estimated to be
amortized from accumulated
other comprehensive income and
regulatory asset in 2007
    
    $
    17,654
    
    
    $
    9,053
  Benefit CostsBenefit Obligations
    
    For the Years EndedAs of December 31,
    
    December 31,2006
    
    2005
    
    2006
    
    2005Discount rate-pension
    
    
    5.90
    %
    
    
    5.66
    %
    
    
    5.66
    %
    
    
    5.84
    %Discount rate-other benefits
    
    
    5.93
    %
    
    
    5.68
    %
    
    
    5.68
    %
    
    
    5.92
    %Rate of compensation increase
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.00
    %Expected long-term return on
plan assets
    
    
    N/A
    
    
    
    N/A
    
    
    
    9.00
    %
    
    
    9.00
    %Initial health care cost trend
rate
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %
    
    
    8.00
    %Ultimate health care cost trend
rate
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    5.00
    %
    
    
    5.00
    %Year ultimate health care trend
rate is reached
    
    
    2011
    
    
    
    2010
    
    
    
    2010
    
    
    
    2009
 101




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   1% Increase
    
    1% DecreaseEffect on other postretirement benefits
expense, after consideration of amounts
capitalized or billed to electric plant
participants
    
    $
    8
    
    
    $
    (7
    )Effect on service and interest cost
components of net periodic other
postretirement benefit costs
    
    $
    11
    
    
    $
    (9
    )Effect on the accumulated other
postretirement benefit obligation
    
    $
    105
    
    
    $
    (87
    )
 Plan Assets
  Percentage of Plan Assets atDecember 31,
    
    Target Asset AllocationAsset Category:
    
    2006
    
    2005
    
    December 31, 2006Equity securities
    
    
    69
    %
    
    
    59
    %
    
    
    68
    %Fixed income
    
    
    25
    
    
    
    26
    
    
    
    25
    %Other
    
    
    6
    
    
    
    15
    
    
    
    7
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   102




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Percentage of Plan Assets atDecember 31,
    
    Target Asset AllocationAsset Category:
    
    2006
    
    2005
    
    December 31, 2006Equity securities
    
    
    74
    %
    
    
    69
    %
    
    
    70
    %Fixed income
    
    
    25
    
    
    
    26
    
    
    
    27
    %Other
    
    
    1
    
    
    
    5
    
    
    
    3
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  Contributions
  Estimated Future Benefit Payments
  Year
    
    Pension
    
    Other Benefits (a)2007
    
    $
    55,110
    
    
    $
    17,4102008
    
    
    60,246
    
    
    
    18,9382009
    
    
    66,346
    
    
    
    20,6442010
    
    
    73,214
    
    
    
    22,8052011
    
    
    82,517
    
    
    
    25,087Years 2012-2016
    
    
    582,230
    
    
    
    167,717
 
 (a)
    
    The expected future other benefit payments take into account the Medicare Part
D subsidy. Employee Savings Plan Benefits
  103




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 9. Leases
      Pinnacle WestYear
    
    Consolidated
    
    
    APS2007
    
    $
    79
    
    
    $
    722008
    
    
    76
    
    
    
    702009
    
    
    72
    
    
    
    662010
    
    
    68
    
    
    
    632011
    
    
    65
    
    
    
    60Thereafter
    
    
    253
    
    
    
    234Total future lease commitments
    
    $
    613
    
    
    $
    565
 10. Jointly-Owned Facilities
  104




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 ConstructionPercent
    
    Plant in
    
    Accumulated
    
    Work inOwned
    
    Service
    
    Depreciation
    
    ProgressGenerating facilities:Palo Verde Units 1 and 3
    
    
    29.1
    %
    
    $
    1,933,812
    
    
    $
    990,600
    
    
    $
    56,150Palo Verde Unit 2 (see Note 9)
    
    
    17.0
    %
    
    
    670,514
    
    
    
    282,112
    
    
    
    8,298Four Corners Units 4 and 5
    
    
    15.0
    %
    
    
    159,342
    
    
    
    97,486
    
    
    
    2,459Navajo Generating Station
Units 1, 2 and 3
    
    
    14.0
    %
    
    
    254,280
    
    
    
    137,658
    
    
    
    3,440Cholla common facilities (a)
    
    
    63.2
    %(b)
    
    
    89,452
    
    
    
    47,204
    
    
    
    5,616Transmission facilities:ANPP 500KV System
    
    
    35.8
    %(b)
    
    
    79,311
    
    
    
    21,432
    
    
    
    3,279Navajo Southern System
    
    
    31.4
    %(b)
    
    
    34,957
    
    
    
    12,421
    
    
    
    6,592Palo Verde  Yuma 500KV
System
    
    
    23.9
    %(b)
    
    
    9,199
    
    
    
    3,703
    
    
    
    271Four Corners Switchyards
    
    
    27.5
    %(b)
    
    
    3,104
    
    
    
    1,261
    
    
    
    Phoenix  Mead System
    
    
    17.1
    %(b)
    
    
    36,020
    
    
    
    4,189
    
    
    
    Palo Verde  Estrella 500KV
System
    
    
    55.5
    %(b)
    
    
    74,243
    
    
    
    2,976
    
    
    
    (28
    )Harquahala
    
    
    80.0
    %(b)
    
    
    
    
    
    
    
    
    
    
    243
 
 (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. 11. Commitments and Contingencies
 Palo Verde Nuclear Generating Station
 Spent Nuclear Fuel and Waste Disposal
   105




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NRC Inspection
  Nuclear Insurance
   Fuel and Purchased Power Commitments
   106




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Actual
    
    Estimated (a)2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    ThereafterCoal take-or-pay
commitments
    
    $
    41
    
    
    $
    48
    
    
    $
    67
    
    
    $
    70
    
    
    $
    72
    
    
    $
    82
    
    
    $
    97
    
    
    $
    77
    
    
    $
    552
 
 (a)
    
    Total take-or-pay commitments are approximately $950 million. The total net
present value of these commitments is approximately $592 million. Coal Mine Reclamation Obligations
  California Energy Market Issues and Refunds in the Pacific Northwest
 FERC
  107




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Construction Program
  APS
    
    $
    893SunCor
    
    
    131Other
    
    
    13Total
    
    $
    1,037
 Natural Gas Supply
  108




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Navajo Nation Litigation
   Superfund
 nd
 109




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Litigation
  12. Asset Retirement Obligations
     2006
    
    
    2005Asset
retirement obligations at the
beginning of year
    
    $
    269
    
    
    $
    252Changes attributable to:Liabilities settled
    
    
    (2
    )
    
    
    (2
    )Accretion expense
    
    
    19
    
    
    
    17Estimated cash flow revisions
    
    
    (18
    )
    
    
    2Asset
retirement obligations at the
end of year
    
    $
    268
    
    
    $
    269
   110




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  TotalUnrealizedFair Value
    
    
    Gains2006Equity securities
    
    $
    164
    
    
    $
    63Fixed income securities
    
    
    180
    
    
    
    3Total
    
    $
    344
    
    
    $
    662005Equity securities
    
    $
    150
    
    
    $
    50Fixed income securities
    
    
    144
    
    
    
    3Total
    
    $
    294
    
    
    $
    53
  Year Ended December 31,2006
    
    2005
    
    2004Realized gains
    
    $
    9
    
    
    $
    6
    
    
    $
    1Realized losses
    
    
    
    
    
    
    (6
    )
    
    
    (2
    )Proceeds from the sale of securities
    
    
    255
    
    
    
    186
    
    
    
    124
  Fair ValueLess than one year
    
    $
    101 year - 5 years
    
    
    475 years - 10 years
    
    
    47Greater than 10 years
    
    
    76Total
    
    $
    180
 13. Selected Quarterly Financial Data (Unaudited)
   111




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2006 Quarter Ended
    
    2006March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalOperating revenues
    
    $
    670,206
    
    
    $
    925,028
    
    
    $
    1,076,442
    
    
    $
    730,072
    
    
    $
    3,401,748Operations and
maintenance
    
    
    178,427
    
    
    
    168,332
    
    
    
    164,396
    
    
    
    180,122
    
    
    
    691,277Operating income
    
    
    57,163
    
    
    
    191,197
    
    
    
    310,440
    
    
    
    60,070
    
    
    
    618,870Income taxes
    
    
    6,793
    
    
    
    49,271
    
    
    
    98,836
    
    
    
    1,518
    
    
    
    156,418Income from continuing
operations
    
    
    11,595
    
    
    
    110,843
    
    
    
    184,179
    
    
    
    10,526
    
    
    
    317,143Net income
    
    
    12,455
    
    
    
    112,154
    
    
    
    184,167
    
    
    
    18,479
    
    
    
    327,255
 2005 Quarter Ended
    
    2005March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalOperating revenues
    
    $
    585,358
    
    
    $
    755,342
    
    
    $
    955,583
    
    
    $
    691,672
    
    
    $
    2,987,955Operations and
maintenance
    
    
    155,084
    
    
    
    153,097
    
    
    
    158,940
    
    
    
    168,706
    
    
    
    635,827Operating income
    
    
    91,825
    
    
    
    178,832
    
    
    
    161,845
    
    
    
    82,787
    
    
    
    515,289Income taxes
    
    
    18,570
    
    
    
    54,988
    
    
    
    40,305
    
    
    
    13,029
    
    
    
    126,892Income from continuing
operations
    
    
    29,599
    
    
    
    85,101
    
    
    
    84,694
    
    
    
    23,769
    
    
    
    223,163Net income
    
    
    24,448
    
    
    
    26,735
    
    
    
    103,737
    
    
    
    21,347
    
    
    
    176,267
  2006 Quarter EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,Basic earnings per share:Income from continuing operations
    
    $
    0.12
    
    
    $
    1.12
    
    
    $
    1.85
    
    
    $
    0.11Net income
    
    
    0.13
    
    
    
    1.13
    
    
    
    1.85
    
    
    
    0.19Diluted earnings per share:Income from continuing operations
    
    $
    0.12
    
    
    $
    1.11
    
    
    $
    1.84
    
    
    $
    0.10Net income
    
    
    0.13
    
    
    
    1.13
    
    
    
    1.84
    
    
    
    0.18
 2005 Quarter EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,Basic earnings per share:Income from continuing operations
    
    $
    0.32
    
    
    $
    0.88
    
    
    $
    0.86
    
    
    $
    0.24Net income
    
    
    0.27
    
    
    
    0.28
    
    
    
    1.05
    
    
    
    0.22Diluted earnings per share:Income from continuing operations
    
    $
    0.32
    
    
    $
    0.88
    
    
    $
    0.86
    
    
    $
    0.24Net income
    
    
    0.27
    
    
    
    0.28
    
    
    
    1.05
    
    
    
    0.22
 112




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14. Fair Value of Financial Instruments
     15. Earnings Per Share
  2006
    
    
    2005
    
    
    2004Basic earnings per share:Income from continuing operations
    
    $
    3.19
    
    
    $
    2.31
    
    
    $
    2.70Income (loss) from discontinued
operations
    
    
    0.10
    
    
    
    (0.48
    )
    
    
    (0.04
    )Earnings per share  basic
    
    $
    3.29
    
    
    $
    1.83
    
    
    $
    2.66Diluted earnings per share:Income from continuing operations
    
    $
    3.17
    
    
    $
    2.31
    
    
    $
    2.69Income (loss) from discontinued
operations
    
    
    0.10
    
    
    
    (.49
    )
    
    
    (0.03
    )Earnings per share  diluted
    
    $
    3.27
    
    
    $
    1.82
    
    
    $
    2.66
  113




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  16. Stock-Based Compensation
      114




---



##### Table of Contents



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, 2006
    
    
    1,696
    
    
    $
    39.65Exercised
    
    
    588
    
    
    
    37.64Forfeited or expired
    
    
    20
    
    
    
    43.23Outstanding at
December 31, 2006
    
    
    1,088
    
    
    
    40.64
    
    
    
    4.0
    
    
    $
    10,935Exercisable at
December 31, 2006
    
    
    1,082
    
    
    
    40.65
    
    
    
    4.0
    
    
    $
    10,863
   Shares
    
    Weighted-Average Grant-DateNonvested shares
    
    (in thousands)
    
    Fair ValueNonvested at January 1, 2006
    
    
    528
    
    
    $
    38.23Granted
    
    
    286
    
    
    
    41.50Vested
    
    
    (205
    )
    
    
    38.25Forfeited
    
    
    (180
    )
    
    
    35.72Nonvested at December 31, 2006
    
    
    429
    
    
    
    41.45
  115




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   2006 Grant
    
    
    
    
    
    2005 Grant
    
    
    
    
    
    2004 Grant2006
    
    Date Fair
    
    2005
    
    Date Fair
    
    2004
    
    Date FairShares
    
    Value
    
    Shares
    
    Value
    
    Shares
    
    ValueRestricted stock
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    4,000
    
    
    $
    37.68
    (a)Performance share
awards
    
    
    274,070
    
    
    
    41.50
    (b)
    
    
    215,300
    
    
    
    41.36
    (b)
    
    
    215,285
    
    
    
    37.85
    (b)Stock ownership
incentive awards
    
    
    12,526
    
    
    
    41.50
    (b)
    
    
    13,114
    
    
    
    44.13
    (b)
    
    
    9,015
    
    
    
    40.29
    (b)Retention unit awards
    
    
    
    
    
    
    49.92
    (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (a)
    
    Restricted stock priced at the average of the high and low market price on the
grant date.(b)
    
    Performance shares 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.
  116




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Business Segments for the Year Ended December 31, 2006RegulatedElectricity
    
    
    Real Estate
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    2,635
    
    
    $
    400
    
    
    $
    367
    
    
    $
    3,402Purchased power and fuel costs
    
    
    960
    
    
    
    
    
    
    
    291
    
    
    
    1,251Other operating expenses
    
    
    791
    
    
    
    325
    
    
    
    57
    
    
    
    1,173Operating margin
    
    
    884
    
    
    
    75
    
    
    
    19
    
    
    
    978Depreciation 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
    
    
    
    13
    
    
    
    474Income taxes
    
    
    120
    
    
    
    32
    
    
    
    5
    
    
    
    157Income from continuing operations
    
    
    259
    
    
    
    50
    
    
    
    8
    
    
    
    317Income from discontinued
operations  net of income
tax expense of $7 (see Note 22)
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Net income
    
    $
    259
    
    
    $
    60
    
    
    $
    8
    
    
    $
    327Total assets
    
    $
    10,566
    
    
    $
    591
    
    
    $
    299
    
    
    $
    11,456Capital expenditures
    
    $
    662
    
    
    $
    201
    
    
    $
    7
    
    
    $
    870
 117




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Business Segments for the Year Ended December 31, 2005RegulatedElectricity
    
    
    Real Estate
    
    
    Other
    
    
    TotalOperating revenues (a)
    
    $
    2,237
    
    
    $
    338
    
    
    $
    413
    
    
    $
    2,988Purchased power and fuel costs
    
    
    595
    
    
    
    
    
    
    
    293
    
    
    
    888Other operating expenses
    
    
    740
    
    
    
    278
    
    
    
    80
    
    
    
    1,098Regulatory disallowance
(see Note 3)
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    139Operating margin
    
    
    763
    
    
    
    60
    
    
    
    40
    
    
    
    863Depreciation and amortization
    
    
    343
    
    
    
    3
    
    
    
    2
    
    
    
    348Interest expense
    
    
    169
    
    
    
    2
    
    
    
    2
    
    
    
    173Other expense (income)
    
    
    (6
    )
    
    
    (3
    )
    
    
    1
    
    
    
    (8
    )Income from continuing
operations before income taxes
    
    
    257
    
    
    
    58
    
    
    
    35
    
    
    
    350Income taxes
    
    
    90
    
    
    
    23
    
    
    
    14
    
    
    
    127Income from continuing operations
    
    
    167
    
    
    
    35
    
    
    
    21
    
    
    
    223Income (loss) from discontinued
operations  net of income
tax benefit of $(30) (see Note
22) (b)
    
    
    
    
    
    
    17
    
    
    
    (64
    )
    
    
    (47
    )Net income (loss)
    
    $
    167
    
    
    $
    52
    
    
    $
    (43
    )
    
    $
    176Total assets
    
    $
    9,732
    
    
    $
    483
    
    
    $
    1,108
    
    
    $
    11,323Capital expenditures
    
    $
    811
    
    
    $
    106
    
    
    $
    11
    
    
    $
    928
 Business Segments for the Year Ended December 31, 2004RegulatedElectricity
    
    
    Real Estate
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    2,035
    
    
    $
    350
    
    
    $
    444
    
    
    $
    2,829Purchased power and fuel costs
    
    
    567
    
    
    
    
    
    
    
    321
    
    
    
    888Other operating expenses
    
    
    683
    
    
    
    284
    
    
    
    64
    
    
    
    1,031Operating margin
    
    
    785
    
    
    
    66
    
    
    
    59
    
    
    
    910Depreciation and amortization
    
    
    384
    
    
    
    4
    
    
    
    4
    
    
    
    392Interest expense
    
    
    170
    
    
    
    1
    
    
    
    1
    
    
    
    172Other expense (income) (c)
    
    
    4
    
    
    
    (6
    )
    
    
    (35
    )
    
    
    (37
    )Income from continuing
operations before income taxes
    
    
    227
    
    
    
    67
    
    
    
    89
    
    
    
    383Income taxes
    
    
    75
    
    
    
    27
    
    
    
    34
    
    
    
    136Income from continuing operations
    
    
    152
    
    
    
    40
    
    
    
    55
    
    
    
    247Income (loss) from discontinued
operations  net of income
tax benefit of $(2) (see Note
22) (b)
    
    
    
    
    
    
    4
    
    
    
    (8
    )
    
    
    (4
    )Net income
    
    $
    152
    
    
    $
    44
    
    
    $
    47
    
    
    $
    243Capital expenditures
    
    $
    483
    
    
    $
    81
    
    
    $
    34
    
    
    $
    598
 118




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 (a)
    
    Effective April 1, 2005, revenues of approximately $40 million from Off-System
Sales, which were previously reported in the other segment, began being reported in the
regulated electricity segment in accordance with the retail rate case settlement.(b)
    
    The other segment relates to the sale and operations of Silverhawk and NAC.
See Note 22.(c)
    
    The other segment includes a $35 million pre-tax ($21 million after-tax) gain
related to the sale of a limited partnership interest in the Phoenix Suns in 2004.
 18. Derivative and Energy Trading Accounting
     119




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Cash Flow Hedges
  2006
    
    2005
    
    2004Gains (losses) on the ineffective portion
of derivatives qualifying for hedge
accounting
    
    $
    (5,666
    )
    
    $
    14,289
    
    
    $
    (1,568
    )Gains (losses) from the change in options
time value excluded from measurement
of effectiveness
    
    
    (10
    )
    
    
    620
    
    
    
    185Gains from the discontinuance of
cash flow hedges
    
    
    453
    
    
    
    556
    
    
    
    1,137
  120




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetDecember 31, 2006
    
    Assets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Regulated electricity:Mark-to-market
    
    $
    458,034
    
    
    $
    96,892
    
    
    $
    (481,661
    )
    
    $
    (135,056
    )
    
    $
    (61,791
    )Margin account
and options
    
    
    77,705
    
    
    
    
    
    
    
    (2,228
    )
    
    
    
    
    
    
    75,477Marketing
and trading:Mark-to-market
    
    
    105,301
    
    
    
    69,480
    
    
    
    (61,553
    )
    
    
    (36,114
    )
    
    
    77,114Options and
emission
allowances
 at cost
    
    
    
    
    
    
    839
    
    
    
    (12,753
    )
    
    
    
    
    
    
    (11,914
    )Total
    
    $
    641,040
    
    
    $
    167,211
    
    
    $
    (558,195
    )
    
    $
    (171,170
    )
    
    $
    78,886
 Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetDecember 31, 2005
    
    Assets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Regulated electricity:Mark-to-market
    
    $
    516,399
    
    
    $
    228,873
    
    
    $
    (335,801
    )
    
    $
    (74,787
    )
    
    $
    334,684Margin account
and options
    
    
    1,814
    
    
    
    
    
    
    
    (124,165
    )
    
    
    
    
    
    
    (122,351
    )Marketing
and trading:Mark-to-market
    
    
    307,883
    
    
    
    291,122
    
    
    
    (236,922
    )
    
    
    (181,417
    )
    
    
    180,666Options and
emission
allowances
 at cost
    
    
    1,683
    
    
    
    77,836
    
    
    
    (23,805
    )
    
    
    (209
    )
    
    
    55,505Total
    
    $
    827,779
    
    
    $
    597,831
    
    
    $
    (720,693
    )
    
    $
    (256,413
    )
    
    $
    448,504
   121




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Credit Risk
  19. Other Income and Other Expense
  2006
    
    
    2005
    
    
    2004Other income:Interest income
    
    $
    18,867
    
    
    $
    14,793
    
    
    $
    6,770SunCor other income
    
    
    10,881
    
    
    
    2,623
    
    
    
    4,458SO2 emission allowance sales and
other (a)
    
    
    10,782
    
    
    
    3,187
    
    
    
    3,026Investment gains  net (b)
    
    
    2,537
    
    
    
    752
    
    
    
    38,256Miscellaneous
    
    
    949
    
    
    
    2,005
    
    
    
    779Total other income
    
    $
    44,016
    
    
    $
    23,360
    
    
    $
    53,289Other expense:Non-operating costs (a)
    
    $
    (16,223
    )
    
    $
    (13,589
    )
    
    $
    (15,524
    )Asset dispositions
    
    
    (2,056
    )
    
    
    (9,759
    )
    
    
    (1,212
    )Miscellaneous
    
    
    (9,521
    )
    
    
    (3,368
    )
    
    
    (4,604
    )Total other expense
    
    $
    (27,800
    )
    
    $
    (26,716
    )
    
    $
    (21,340
    )
 
 (a)
    
    As defined by the FERC, includes below-the-line non-operating utility income and expense
(items excluded from utility rate recovery).(b)
    
    Includes a $35 million gain ($21 million after tax) related to the sale of a limited
partnership interest in the Phoenix Suns in 2004. 122




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 20. Variable-Interest Entities
    21. Guarantees
    123




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  22. Discontinued Operations
 Silverhawk 
 SunCor 
 NAC 
  124




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2006
    
    
    2005
    
    
    2004Revenue:SunCor  commercial operations
    
    $
    3
    
    
    $
    9
    
    
    $
    21Silverhawk
    
    
    1
    
    
    
    95
    
    
    
    61NAC
    
    
    
    
    
    
    
    
    
    
    34Total revenue
    
    $
    4
    
    
    $
    104
    
    
    $
    116Income (loss) before taxes:SunCor  commercial operations
    
    $
    17
    
    
    $
    28
    
    
    $
    6Silverhawk (a)
    
    
    1
    
    
    
    (111
    )
    
    
    (18
    )NAC
    
    
    (1
    )
    
    
    6
    
    
    
    7Total income (loss) before taxes
    
    $
    17
    
    
    $
    (77
    )
    
    $
    (5
    )Income (loss) after taxes:SunCor  commercial operations
    
    $
    10
    
    
    $
    17
    
    
    $
    4Silverhawk
    
    
    1
    
    
    
    (67
    )
    
    
    (12
    )NAC
    
    
    (1
    )
    
    
    3
    
    
    
    4Total income (loss) after taxes
    
    $
    10
    
    
    $
    (47
    )
    
    $
    (4
    )
 
 (a)
    
    Income before income taxes includes an interest expense allocation, net of
capitalized amounts, of $13 million in 2005 and $6 million in 2004. The allocation was
based on Pinnacle Wests weighted-average interest rate applied to the net property,
plant and equipment. 125




---



##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(ARIZONA PUBLIC SERVICE COMPANY)
 Internal Control  Integrated Framework Internal Control  Integrated Framework,
  126




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal
ControlIntegrated Framework
   127




---



##### Table of Contents



Internal ControlIntegrated Framework Internal
ControlIntegrated Framework
  
  128




---



##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
 
 STATEMENTS OF INCOME
 (dollars in thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Electric Operating Revenues:Regulated electricity
    
    $
    2,640,989
    
    
    $
    2,244,951
    
    
    $
    2,051,602Marketing and trading
    
    
    17,524
    
    
    
    25,842
    
    
    
    145,519Total
    
    
    2,658,513
    
    
    
    2,270,793
    
    
    
    2,197,121Operating Expenses:Regulated electricity
fuel and purchased power
    
    
    965,712
    
    
    
    656,654
    
    
    
    612,300Marketing and trading
fuel and purchased power
    
    
    4,055
    
    
    
    32,328
    
    
    
    150,954Operations and maintenance
    
    
    665,631
    
    
    
    591,941
    
    
    
    540,277Depreciation and amortization
    
    
    353,057
    
    
    
    325,174
    
    
    
    336,648Income taxes (Notes 4 and S-1)
    
    
    144,127
    
    
    
    157,273
    
    
    
    113,696Other taxes
    
    
    127,989
    
    
    
    125,810
    
    
    
    114,265Total
    
    
    2,260,571
    
    
    
    1,889,180
    
    
    
    1,868,140Operating Income
    
    
    397,942
    
    
    
    381,613
    
    
    
    328,981Other Income (Deductions):Regulatory disallowance (Note 3)
    
    
    
    
    
    
    (138,562
    )
    
    
    Income taxes (Notes 4 and S-1)
    
    
    5,200
    
    
    
    59,263
    
    
    
    (6,334
    )Allowance for equity funds used
during construction
    
    
    14,312
    
    
    
    11,191
    
    
    
    4,885Other income (Note S-4)
    
    
    31,902
    
    
    
    22,141
    
    
    
    30,593Other expense (Note S-4)
    
    
    (23,830
    )
    
    
    (23,204
    )
    
    
    (13,816
    )Total
    
    
    27,584
    
    
    
    (69,171
    )
    
    
    15,328Interest Deductions:Interest on long-term debt
    
    
    149,240
    
    
    
    138,476
    
    
    
    140,556Interest on short-term borrowings
    
    
    9,529
    
    
    
    7,026
    
    
    
    6,427Debt discount, premium and expense
    
    
    4,363
    
    
    
    4,085
    
    
    
    4,854Allowance for borrowed funds used
during construction
    
    
    (7,336
    )
    
    
    (7,624
    )
    
    
    (7,155
    )Total
    
    
    155,796
    
    
    
    141,963
    
    
    
    144,682Net Income
    
    $
    269,730
    
    
    $
    170,479
    
    
    $
    199,627
  129




---



##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
 
 BALANCE SHEETS
 (dollars in thousands)
 December 31,2006
    
    
    2005ASSETSUtility Plant (Notes 1, 6, 9 and 10)Electric plant in service and held for future use
    
    $
    11,094,868
    
    
    $
    10,682,999Less accumulated depreciation and amortization
    
    
    3,789,534
    
    
    
    3,616,886Net
    
    
    7,305,334
    
    
    
    7,066,113Construction work in progress
    
    
    365,704
    
    
    
    314,584Intangible assets, net of accumulated amortization of
$217,099 and $181,046
    
    
    95,601
    
    
    
    90,327Nuclear fuel, net of accumulated amortization of
$50,741 and $53,984
    
    
    60,100
    
    
    
    54,184Total utility plant
    
    
    7,826,739
    
    
    
    7,525,208Investments and Other AssetsDecommissioning trust accounts (Note 12)
    
    
    343,771
    
    
    
    293,943Assets from risk management and trading activities
(Note S-3)
    
    
    96,892
    
    
    
    234,372Other assets
    
    
    67,763
    
    
    
    64,128Total investments and other assets
    
    
    508,426
    
    
    
    592,443Current Assets:Cash and cash equivalents
    
    
    81,870
    
    
    
    49,933Investment in debt securities
    
    
    32,700
    
    
    
    Customer and other receivables
    
    
    410,436
    
    
    
    421,621Allowance for doubtful accounts
    
    
    (4,223
    )
    
    
    (3,568
    )Materials and supplies (at average cost)
    
    
    125,802
    
    
    
    109,736Fossil fuel (at average cost)
    
    
    21,973
    
    
    
    23,658Assets from risk management and trading activities
(Note S-3)
    
    
    539,308
    
    
    
    532,923Deferred income taxes
    
    
    19,220
    
    
    
    Other
    
    
    13,367
    
    
    
    14,639Total current assets
    
    
    1,240,453
    
    
    
    1,148,942Deferred Debits:Deferred fuel and purchased power regulatory asset
(Notes 1, 3, 4 and S-1)
    
    
    160,268
    
    
    
    172,756Other regulatory assets (Notes 1, 3, 4 and S-1)
    
    
    686,016
    
    
    
    151,123Unamortized debt issue costs
    
    
    26,393
    
    
    
    25,279Other
    
    
    65,397
    
    
    
    91,690Total deferred debits
    
    
    938,074
    
    
    
    440,848Total Assets
    
    $
    10,513,692
    
    
    $
    9,707,441
  130




---



##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)
 December 31,2006
    
    
    2005LIABILITIES AND EQUITYCapitalization:Common stock
    
    $
    178,162
    
    
    $
    178,162Additional paid-in capital (Note 3)
    
    
    2,065,918
    
    
    
    1,853,098Retained earnings
    
    
    960,405
    
    
    
    860,675Accumulated other comprehensive income (loss):Minimum pension liability adjustment
    
    
    
    
    
    
    (86,132
    )Derivative instruments
    
    
    2,988
    
    
    
    179,422Common stock equity
    
    
    3,207,473
    
    
    
    2,985,225Long-term debt less current maturities (Note 6)
    
    
    2,877,502
    
    
    
    2,479,703Total capitalization
    
    
    6,084,975
    
    
    
    5,464,928Current Liabilities:Current maturities of long-term debt (Note 6)
    
    
    968
    
    
    
    85,620Accounts payable
    
    
    223,417
    
    
    
    215,384Accrued taxes
    
    
    381,444
    
    
    
    360,737Accrued interest
    
    
    45,254
    
    
    
    25,003Customer deposits
    
    
    61,900
    
    
    
    55,474Deferred income taxes (Notes 4 and S-1)
    
    
    
    
    
    
    64,210Liabilities from risk management and trading
activities (Note S-3)
    
    
    490,855
    
    
    
    480,138Other
    
    
    74,728
    
    
    
    227,398Total current liabilities
    
    
    1,278,566
    
    
    
    1,513,964Deferred Credits and Other:Deferred income taxes (Notes 4 and S-1)
    
    
    1,215,862
    
    
    
    1,215,403Regulatory liabilities (Notes 1, 3, 4, and S-1)
    
    
    635,431
    
    
    
    592,494Liability for asset retirements (Note 12)
    
    
    268,389
    
    
    
    269,011Pension and
other postretirement liabilities (Notes 8 and S-6)
    
    
    551,531
    
    
    
    233,342Customer advances for construction
    
    
    71,211
    
    
    
    60,287Unamortized gain  sale of utility plant (Note 9)
    
    
    41,182
    
    
    
    45,757Liabilities from risk management and trading
activities (Note S-3)
    
    
    135,056
    
    
    
    83,774Other
    
    
    231,489
    
    
    
    228,481Total deferred credits and other
    
    
    3,150,151
    
    
    
    2,728,549Commitments and Contingencies (Notes 3, 11, 12 and S-5)Total Liabilities and Equity
    
    $
    10,513,692
    
    
    $
    9,707,441
  131




---



##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
 
 STATEMENTS OF CASH FLOWS
 (dollars in thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash Flows from Operating Activities:Net income
    
    $
    269,730
    
    
    $
    170,479
    
    
    $
    199,627Adjustments to reconcile net income to net cash
provided by operating activities:Regulatory disallowance
    
    
    
    
    
    
    138,562
    
    
    
    Depreciation and amortization including nuclear fuel
    
    
    381,173
    
    
    
    353,082
    
    
    
    367,094Deferred fuel and purchased power
    
    
    (252,849
    )
    
    
    (172,756
    )
    
    
    Deferred fuel and purchased power amortization
    
    
    265,337
    
    
    
    
    
    
    
    Allowance for equity funds used during
construction
    
    
    (14,312
    )
    
    
    (11,191
    )
    
    
    (4,885
    )Deferred income taxes
    
    
    (305
    )
    
    
    9,659
    
    
    
    (140,855
    )Change in derivative mark-to-market valuations
    
    
    6,893
    
    
    
    3,492
    
    
    
    (15,807
    )Changes in current assets and liabilities:Customer and other receivables
    
    
    20,970
    
    
    
    (56,152
    )
    
    
    (24,146
    )Materials, supplies and fossil fuel
    
    
    (14,381
    )
    
    
    (12,268
    )
    
    
    4,643Other current assets
    
    
    3,666
    
    
    
    (2,592
    )
    
    
    (2,529
    )Accounts payable
    
    
    5,825
    
    
    
    (12,372
    )
    
    
    88,937Accrued taxes
    
    
    23,678
    
    
    
    67,454
    
    
    
    202,047Collateral
    
    
    (175,799
    )
    
    
    169,080
    
    
    
    5,671Other current liabilities
    
    
    45,125
    
    
    
    (37,781
    )
    
    
    22,715Change in risk management and trading  liabilities
    
    
    (121,833
    )
    
    
    115,495
    
    
    
    8,879Change in risk management and trading  assets
    
    
    (74,208
    )
    
    
    15,449
    
    
    
    (6,845
    )Change in pension and other postretirement liabilities
    
    
    7,406
    
    
    
    (10,730
    )
    
    
    22,361Change in other long-term assets
    
    
    2,828
    
    
    
    (24,752
    )
    
    
    (37,541
    )Change in other long-term liabilities
    
    
    14,769
    
    
    
    19,732
    
    
    
    28,772Net cash flow provided by operating activities
    
    
    393,713
    
    
    
    721,890
    
    
    
    718,138Cash Flows from Investing Activities:Capital expenditures
    
    
    (648,743
    )
    
    
    (609,857
    )
    
    
    (513,677
    )Transfer of PWEC Dedicated Assets to APS
    
    
    
    
    
    
    (500,000
    )
    
    
    Purchase of Sundance Plant
    
    
    
    
    
    
    (185,046
    )
    
    
    Allowance for borrowed funds used during construction
    
    
    (7,336
    )
    
    
    (7,624
    )
    
    
    (7,155
    )Purchases of investment securities
    
    
    (1,291,903
    )
    
    
    (1,476,623
    )
    
    
    (871,610
    )Proceeds from sale of investment securities
    
    
    1,259,203
    
    
    
    1,657,798
    
    
    
    760,285Proceeds from nuclear decommissioning trust sales
    
    
    254,651
    
    
    
    186,215
    
    
    
    123,795Investment in nuclear decommissioning trust
    
    
    (275,393
    )
    
    
    (204,633
    )
    
    
    (135,239
    )Repayment of loan by Pinnacle West Energy
    
    
    
    
    
    
    500,000
    
    
    
    Other
    
    
    (4,470
    )
    
    
    (5,372
    )
    
    
    10,639Net cash flow used for investing activities
    
    
    (713,991
    )
    
    
    (645,142
    )
    
    
    (632,962
    )Cash Flows from Financing Activities:Issuance of long-term debt
    
    
    395,481
    
    
    
    411,787
    
    
    
    478,140Equity infusion
    
    
    212,820
    
    
    
    250,000
    
    
    
    Dividends paid on common stock
    
    
    (170,000
    )
    
    
    (170,000
    )
    
    
    (170,000
    )Repayment and reacquisition of long-term debt
    
    
    (86,086
    )
    
    
    (568,177
    )
    
    
    (385,893
    )Net cash flow (used for) provided by financing
activities
    
    
    352,215
    
    
    
    (76,390
    )
    
    
    (77,753
    )Net increase in cash and cash equivalents
    
    
    31,937
    
    
    
    358
    
    
    
    7,423Cash and cash equivalents at beginning of year
    
    
    49,933
    
    
    
    49,575
    
    
    
    42,152Cash and cash equivalents at end of year
    
    $
    81,870
    
    
    $
    49,933
    
    
    $
    49,575Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes, net of refunds
    
    $
    117,831
    
    
    $
    34,252
    
    
    $
    68,074Interest, net of amounts capitalized
    
    $
    131,183
    
    
    $
    146,207
    
    
    $
    149,148
  132




---



##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
 
 STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
 (dollars in thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004COMMON STOCK
    
    $
    178,162
    
    
    $
    178,162
    
    
    $
    178,162ADDITIONAL PAID-IN CAPITAL
    
    
    2,065,918
    
    
    
    1,853,098
    
    
    
    1,246,804RETAINED EARNINGSBalance at beginning of year
    
    
    860,675
    
    
    
    860,196
    
    
    
    830,569Net income
    
    
    269,730
    
    
    
    170,479
    
    
    
    199,627Common stock dividends
    
    
    (170,000
    )
    
    
    (170,000
    )
    
    
    (170,000
    )Balance at end of year
    
    
    960,405
    
    
    
    860,675
    
    
    
    860,196ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)Balance at beginning of year
    
    
    93,290
    
    
    
    (52,760
    )
    
    
    (51,905
    )Unrealized gain (loss) on derivative
instruments, net of tax expense (benefit) of
($111,367), $140,135 and $16,824
    
    
    (173,872
    )
    
    
    218,656
    
    
    
    25,892Reclassification of realized gain to
income, net of tax benefit of
($1,657), ($37,082) and ($8,344)
    
    
    (2,562
    )
    
    
    (57,561
    )
    
    
    (12,818
    )Minimum pension liability adjustment, net of
tax expense (benefit) of $27,424, ($9,023)
and ($8,936)
    
    
    42,731
    
    
    
    (15,045
    )
    
    
    (13,929
    )Adjustment to reflect a change in accounting
for pension and other postretirement
benefits, net of tax expense of $27,760
(Notes 8 and S-6)
    
    
    43,401
    
    
    
    
    
    
    
    Balance at end of year
    
    
    2,988
    
    
    
    93,290
    
    
    
    (52,760
    )TOTAL COMMON STOCK EQUITY
    
    $
    3,207,473
    
    
    $
    2,985,225
    
    
    $
    2,232,402COMPREHENSIVE INCOMENet income
    
    $
    269,730
    
    
    $
    170,479
    
    
    $
    199,627Other comprehensive income (loss)
    
    
    (133,703
    )
    
    
    146,050
    
    
    
    (855
    )Total comprehensive income
    
    $
    136,027
    
    
    $
    316,529
    
    
    $
    198,772
  133




---



##### Table of Contents



APSConsolidated
    
    SupplementalFootnote
    
    FootnoteReference
    
    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
    
    Note 6
    
    
    Common Stock and Treasury Stock
    
    Note 7
    
    
    Retirement Plans and Other Benefits
    
    Note 8
    
 Note S-6Leases
    
    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 of Financial Instruments
    
    Note 14
    
    
    Earnings Per Share
    
    Note 15
    
    
    Stock-Based Compensation
    
    Note 16
    
    
    Business Segments
    
    Note 17
    
    
    Derivative and Energy Trading Activities
    
    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-5
 134




---



##### Table of Contents



NOTES TO ARIZONA PUBLIC SERVICE COMPANY
 S-1. Income Taxes
        Year Ended December 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    114,971
    
    
    $
    79,917
    
    
    $
    207,306State
    
    
    21,442
    
    
    
    8,434
    
    
    
    53,579Total current
    
    
    136,413
    
    
    
    88,351
    
    
    
    260,885Deferred
    
    
    2,514
    
    
    
    9,659
    
    
    
    (140,855
    )Total income tax expense
    
    $
    138,927
    
    
    $
    98,010
    
    
    $
    120,030
  135




---



##### Table of Contents



NOTES TO ARIZONA PUBLIC SERVICE COMPANY
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Federal income tax expense at 35%
statutory rate
    
    $
    143,030
    
    
    $
    93,971
    
    
    $
    111,880Increases (reductions) in tax expense
resulting from:State income tax net of federal income
tax benefit
    
    
    15,684
    
    
    
    8,986
    
    
    
    12,496Credits and favorable adjustments related
to prior years resolved in current year
    
    
    (10,518
    )
    
    
    
    
    
    
    (315
    )Medicare Subsidy Part-D
    
    
    (3,036
    )
    
    
    (2,465
    )
    
    
    (1,507
    )Allowance for equity funds used during
construction (see Note 1)
    
    
    (4,656
    )
    
    
    (3,694
    )
    
    
    (1,543
    )Other
    
    
    (1,577
    )
    
    
    1,212
    
    
    
    (981
    )Income tax expense
    
    $
    138,927
    
    
    $
    98,010
    
    
    $
    120,030
  December 31,2006
    
    
    2005Current asset
    
    $
    19,220
    
    
    $
    Current liability
    
    
    
    
    
    
    (64,210
    )Long-term liability
    
    
    (1,215,862
    )
    
    
    (1,215,403
    )Accumulated deferred income taxes  net
    
    $
    (1,196,642
    )
    
    $
    (1,279,613
    )
 136




---



##### Table of Contents



NOTES TO ARIZONA PUBLIC SERVICE COMPANY
  December 31,2006
    
    
    2005DEFERRED TAX ASSETSRegulatory liabilities:Asset retirement obligation
    
    $
    203,846
    
    
    $
    189,726Federal excess deferred income tax
    
    
    12,714
    
    
    
    14,446Deferred fuel and purchased power 
mark-to-market
    
    
    
    
    
    
    11,923Tax benefit of Medicare subsidy
    
    
    18,214
    
    
    
    Other
    
    
    27,283
    
    
    
    29,720Risk management and trading activities
    
    
    244,611
    
    
    
    171,640Pension and other postretirement
liabilities
    
    
    257,910
    
    
    
    72,376Deferred gain on Palo Verde Unit 2
sale-leaseback
    
    
    16,160
    
    
    
    17,868Other
    
    
    86,442
    
    
    
    71,567Total deferred tax assets
    
    
    867,180
    
    
    
    579,266DEFERRED TAX LIABILITIESPlant-related
    
    
    (1,509,812
    )
    
    
    (1,426,158
    )Risk management and trading activities
    
    
    (220,303
    )
    
    
    (301,709
    )Regulatory assets:Deferred fuel and purchased power
    
    
    (62,889
    )
    
    
    (67,461
    )Deferred fuel and purchased power 
mark-to-market
    
    
    (24,427
    )
    
    
    Pension and other postretirement
benefits
    
    
    (185,602
    )
    
    
    Other
    
    
    (60,789
    )
    
    
    (63,551
    )Total deferred tax liabilities
    
    
    (2,063,822
    )
    
    
    (1,858,879
    )Accumulated deferred income taxes  net
    
    $
    (1,196,642
    )
    
    $
    (1,279,613
    )
 137




---



##### Table of Contents



NOTES TO ARIZONA PUBLIC SERVICE COMPANY
 S-2. Selected Quarterly Financial Data (Unaudited)
  2006 Quarter Ended,
    
    2006March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalOperating revenues
    
    $
    476,869
    
    
    $
    718,850
    
    
    $
    886,686
    
    
    $
    576,108
    
    
    $
    2,658,513Operations and maintenance
    
    
    173,353
    
    
    
    164,373
    
    
    
    156,170
    
    
    
    171,735
    
    
    
    665,631Operating income
    
    
    25,044
    
    
    
    119,967
    
    
    
    200,580
    
    
    
    52,351
    
    
    
    397,942Net income (loss)
    
    
    (5,521
    )
    
    
    93,757
    
    
    
    168,634
    
    
    
    12,860
    
    
    
    269,730
 2005 Quarter Ended,
    
    2005March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalOperating revenues
    
    $
    441,292
    
    
    $
    588,757
    
    
    $
    748,348
    
    
    $
    492,396
    
    
    $
    2,270,793Operations and maintenance
    
    
    142,294
    
    
    
    138,314
    
    
    
    149,198
    
    
    
    162,135
    
    
    
    591,941Operating income
    
    
    58,743
    
    
    
    95,321
    
    
    
    174,415
    
    
    
    53,134
    
    
    
    381,613Net income
    
    
    27,045
    
    
    
    63,998
    
    
    
    61,093
    
    
    
    18,343
    
    
    
    170,479
 S-3. Derivative and Energy Trading Accounting
  Cash Flow Hedges
  2006
    
    2005
    
    2004Gains (losses) on the ineffective portion of
derivatives qualifying for hedge
accounting
    
    $
    (5,666
    )
    
    $
    14,452
    
    
    $
    (1,570
    )Gains (losses) from the change in options
time value excluded from measurement
of effectiveness
    
    
    (10
    )
    
    
    620
    
    
    
    185Gains from the discontinuance of
cash flow hedges
    
    
    178
    
    
    
    473
    
    
    
    575
  138




---



##### Table of Contents



NOTES TO ARIZONA PUBLIC SERVICE COMPANY
  
    
    Regulated Electricity  non-trading derivative instruments that hedge APS purchases
and sales of electricity and fuel for its Native Load requirements; and
    
    Marketing and Trading  both non-trading and trading derivative instruments.
  Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetDecember 31, 2006
    
    Assets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Regulated Electricity:Mark-to-market
    
    $
    458,034
    
    
    $
    96,892
    
    
    $
    (481,661
    )
    
    $
    (135,056
    )
    
    $
    (61,791
    )Margin account
and options
    
    
    77,705
    
    
    
    
    
    
    
    (2,228
    )
    
    
    
    
    
    
    75,477Marketing and Trading:Mark-to-market
    
    
    3,569
    
    
    
    
    
    
    
    (6,654
    )
    
    
    
    
    
    
    (3,085
    )Options at cost
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    
    
    
    
    (312
    )Total
    
    $
    539,308
    
    
    $
    96,892
    
    
    $
    (490,855
    )
    
    $
    (135,056
    )
    
    $
    10,289
 Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetDecember 31, 2005
    
    Assets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Regulated Electricity:Mark-to-market
    
    $
    516,399
    
    
    $
    228,873
    
    
    $
    (335,801
    )
    
    $
    (74,787
    )
    
    $
    334,684Margin account
and options
    
    
    1,814
    
    
    
    
    
    
    
    (124,165
    )
    
    
    
    
    
    
    (122,351
    )Marketing and Trading:Mark-to-market
    
    
    13,027
    
    
    
    5,499
    
    
    
    (20,172
    )
    
    
    (8,778
    )
    
    
    (10,424
    )Options at cost
    
    
    1,683
    
    
    
    
    
    
    
    
    
    
    
    (209
    )
    
    
    1,474Total
    
    $
    532,923
    
    
    $
    234,372
    
    
    $
    (480,138
    )
    
    $
    (83,774
    )
    
    $
    203,383
   139




---



##### Table of Contents



NOTES TO ARIZONA PUBLIC SERVICE COMPANY
 S-4. Other Income and Other Expense
  2006
    
    
    2005
    
    
    2004Other income:Interest income
    
    $
    16,526
    
    
    $
    14,513
    
    
    $
    22,354SO2 emission allowance sales
and other (a)
    
    
    10,782
    
    
    
    3,187
    
    
    
    3,026Investment gains  net
    
    
    3,645
    
    
    
    1,705
    
    
    
    3,192Miscellaneous
    
    
    949
    
    
    
    2,736
    
    
    
    2,021Total other income
    
    $
    31,902
    
    
    $
    22,141
    
    
    $
    30,593Other expense:Non-operating costs (a)
    
    $
    (15,415
    )
    
    $
    (11,706
    )
    
    $
    (8,923
    )Asset dispositions
    
    
    (1,851
    )
    
    
    (9,759
    )
    
    
    (1,212
    )Miscellaneous
    
    
    (6,564
    )
    
    
    (1,739
    )
    
    
    (3,681
    )Total other expense
    
    $
    (23,830
    )
    
    $
    (23,204
    )
    
    $
    (13,816
    )
 
 (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
  140




---



##### Table of Contents



NOTES TO ARIZONA PUBLIC SERVICE COMPANY
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Electric operating revenues:Pinnacle West  marketing and trading
    
    $
    6
    
    
    $
    6
    
    
    $
    13Pinnacle West Energy
    
    
    
    
    
    
    2
    
    
    
    3Total
    
    $
    6
    
    
    $
    8
    
    
    $
    16Fuel and purchased power costs:Pinnacle West Energy
    
    $
    
    
    
    $
    61
    
    
    $
    75Capital expenditures:Pinnacle West  marketing and trading
    
    $
    
    
    
    $
    
    
    
    $
    11Pinnacle West
    
    
    
    
    
    
    
    
    
    
    22Total
    
    $
    
    
    
    $
    
    
    
    $
    33Other:Pinnacle West Energy interest income
    
    $
    
    
    
    $
    7
    
    
    $
    19Equity infusion from Pinnacle West
(see Note 3)
    
    $
    210
    
    
    $
    250
    
    
    $
    
 As of December 31,2006
    
    
    2005Net intercompany receivables (payables):Pinnacle West  marketing and trading
    
    $
    2
    
    
    $
    82APS Energy Services
    
    
    1
    
    
    
    2Pinnacle West
    
    
    (20
    )
    
    
    (2
    )Total
    
    $
    (17
    )
    
    $
    82
   141




---



##### Table of Contents



NOTES TO ARIZONA PUBLIC SERVICE COMPANY
   S-6. Retirement
    Plans and Other Benefits
    PensionIncremental Effect of Adopting

Balances


Adoption of


Regulatory


BalanceSFAS No. 158 as of

Before


SFAS No.


Accounting


AfterDecember 31, 2006

Adoption


158


Adjustments


AdoptionAssets:Intangible asset



$

11,487





$

(11,487

)



$






$


Regulatory asset










318,461



318,461Liabilities:Current benefit liability






(3,122
)






(3,122
)Accumulated deferred income
    taxes  current






1,225







1,225Noncurrent benefit liability


(183,432
)


(232,421
)






(415,853
)Accumulated deferred income
    taxes  long term


67,471



95,709



(124,964
)


38,217Common Stock Equity:Accumulated other comprehensive
    loss (income)


43,401



150,095



(193,497
)


   Other BenefitsIncremental Effect of Adopting

Balances


Adoption of


Regulatory


BalanceSFAS No. 158 as of

Before


SFAS No.


Accounting


AfterDecember 31, 2006

Adoption


158


Adjustments


AdoptionAssets:Noncurrent benefit asset



$

18,853





$

(18,853

)



$







$

Regulatory asset










154,531



154,531Liabilities:Noncurrent benefit liability






(135,678
)






(135,678
)Regulatory liability










(46,417
)


(46,417
)Accumulated deferred income
    taxes  long term


4,663



88,841



(42,424
)


51,080Common Stock Equity:Accumulated other comprehensive
    loss (income)






65,690



(65,690
)




  142




---



##### Table of Contents



PINNACLE
WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF INCOME
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Operating Revenues
    
    $
    119,224
    
    
    $
    154,053
    
    
    $
    81,716Operating ExpensesFuel and purchased power
    
    
    101,360
    
    
    
    95,223
    
    
    
    49,926Other operating expenses
    
    
    9,607
    
    
    
    3,268
    
    
    
    3,380Total
    
    
    110,967
    
    
    
    98,491
    
    
    
    53,306Operating Income
    
    
    8,257
    
    
    
    55,562
    
    
    
    28,410OtherEquity in earnings of subsidiaries
    
    
    324,504
    
    
    
    58,759
    
    
    
    240,732Other income
    
    
    2,208
    
    
    
    5,337
    
    
    
    2,058Total
    
    
    326,712
    
    
    
    64,096
    
    
    
    242,790Interest Expense
    
    
    20,522
    
    
    
    16,472
    
    
    
    15,490Income from continuing operations
    
    
    314,447
    
    
    
    103,186
    
    
    
    255,710Income tax benefit
    
    
    (12,898
    )
    
    
    (62,761
    )
    
    
    (12,789
    )Income from continuing operations  net of
income taxes
    
    
    327,345
    
    
    
    165,947
    
    
    
    268,499Income (loss) from discontinued operations
    
    
    (90
    )
    
    
    10,320
    
    
    
    (25,304
    )Net Income
    
    $
    327,255
    
    
    $
    176,267
    
    
    $
    243,195
 143




---



##### Table of Contents



PINNACLE
WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
 Balance at December 31,2006
    
    
    2005ASSETSCurrent AssetsCash and cash equivalents
    
    $
    11
    
    
    $
    85,374Customer and other receivables
    
    
    174,583
    
    
    
    180,083Allowance for doubtful accounts
    
    
    (1,200
    )
    
    
    (1,200
    )Assets from risk management and trading
activities
    
    
    101,604
    
    
    
    294,856Other current assets
    
    
    10,810
    
    
    
    4,805Total current assets
    
    
    285,808
    
    
    
    563,918Investments and other assetsAssets from long-term risk management
and trading activities
    
    
    70,319
    
    
    
    363,459Investments in subsidiaries
    
    
    3,545,329
    
    
    
    3,396,150Other assets
    
    
    73,300
    
    
    
    68,848Total investments and other assets
    
    
    3,688,948
    
    
    
    3,828,457Total Assets
    
    
    $3,974,756
    
    
    
    $4,392,375Liabilities and Common Stock EquityCurrent LiabilitiesAccounts payable
    
    $
    80,903
    
    
    $
    126,353Accrued taxes
    
    
    (118,073
    )
    
    
    (68,545
    )Short-term borrowings
    
    
    27,900
    
    
    
    Current maturities of long-term debt
    
    
    115
    
    
    
    298,672Deferred income taxes
    
    
    18,238
    
    
    
    Liabilities from risk management and
trading activities
    
    
    67,340
    
    
    
    240,555Other current liabilities
    
    
    130,985
    
    
    
    184,275Total current liabilities
    
    
    207,408
    
    
    
    781,310Long-term debt less current maturities
    
    
    175,000
    
    
    
    101Deferred credits and otherDeferred income taxes
    
    
    19,582
    
    
    
    42,325Pension and other postretirement liabilities
    
    
    13,437
    
    
    
    23,828Liabilities from risk management and
trading activities
    
    
    36,114
    
    
    
    172,639Other
    
    
    23,218
    
    
    
    300Total deferred credits and other
    
    
    92,351
    
    
    
    239,092Common Stock EquityCommon stock
    
    
    2,587,201
    
    
    
    2,539,233Accumulated other comprehensive income
    
    
    17,512
    
    
    
    71,830Retained earnings
    
    
    895,284
    
    
    
    760,809Total common stock equity
    
    
    3,499,997
    
    
    
    3,371,872Total Liabilities and Common Stock Equity
    
    $
    3,974,756
    
    
    $
    4,392,375
 144




---



##### Table of Contents



PINNACLE
WEST CAPITAL CORPORATION HOLDING COMPANY
SCHEDULE I  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
 Year Ended December 312006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet Income
    
    $
    327,255
    
    
    $
    176,267
    
    
    $
    243,195Less: equity in earnings of subsidiaries  net
    
    
    (324,504
    )
    
    
    (58,759
    )
    
    
    (240,732
    )Net income attributable to Pinnacle West
    
    
    2,751
    
    
    
    117,508
    
    
    
    2,463Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    470
    
    
    
    551
    
    
    
    5,693Deferred income taxes
    
    
    30,384
    
    
    
    (19,929
    )
    
    
    4,449Change in mark-to-market valuations
    
    
    21,698
    
    
    
    (15,162
    )
    
    
    (3,107
    )Customer and other receivables
    
    
    2,816
    
    
    
    1,730
    
    
    
    94,067Accounts payable
    
    
    (55,675
    )
    
    
    43,969
    
    
    
    8,345Accrued taxes
    
    
    (49,529
    )
    
    
    (84,758
    )
    
    
    17,698Change in risk management and trading  net
    
    
    65,633
    
    
    
    (82,650
    )
    
    
    8,435Other net
    
    
    (20,746
    )
    
    
    102,432
    
    
    
    (24,410
    )Net cash flow (used for) provided by
operating activities
    
    
    (2,198
    )
    
    
    63,691
    
    
    
    113,633Cash flows from investing activitiesInvestments in and advances to subsidiaries  net
    
    
    (4,677
    )
    
    
    (230,229
    )
    
    
    (324,017
    )Repayments
and advances of loans from subsidiaries
    
    
    2,686
    
    
    
    2,402
    
    
    
    330,161Dividends received from subsidiaries
    
    
    180,000
    
    
    
    220,000
    
    
    
    255,000Purchases of investment securities
    
    
    (147,501
    )
    
    
    (1,485,655
    )
    
    
    (169,145
    )Proceeds from sale of investment securities
    
    
    147,501
    
    
    
    1,485,683
    
    
    
    191,145Other
    
    
    
    
    
    
    
    
    
    
    (1,336
    )Net cash flow (used for) provided by
investing activities
    
    
    178,009
    
    
    
    (7,799
    )
    
    
    281,808Cash flows from financing activitiesIssuance of long-term debt
    
    
    175,000
    
    
    
    
    
    
    
    Short-term borrowings and payments  net
    
    
    27,900
    
    
    
    
    
    
    
    Dividends paid on common stock
    
    
    (201,221
    )
    
    
    (186,677
    )
    
    
    (166,772
    )Repayment of long-term debt
    
    
    (298,687
    )
    
    
    (165,104
    )
    
    
    (215,854
    )Common stock equity issuance
    
    
    35,834
    
    
    
    290,542
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    18,181Net cash flow (used for) by financing
activities
    
    
    (261,174
    )
    
    
    (61,239
    )
    
    
    (364,445
    )Net increase (decrease) in cash and cash
equivalents
    
    
    (85,363
    )
    
    
    (5,347
    )
    
    
    30,996Cash and cash equivalents at beginning of year
    
    
    85,374
    
    
    
    90,721
    
    
    
    59,725Cash and cash equivalents at end of year
    
    $
    11
    
    
    $
    85,374
    
    
    $
    90,721
 145




---



##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
 
 SCHEDULE II  RESERVE FOR UNCOLLECTIBLES
 Column A
    
    Column B
    
    Column C
    
    Column D
    
    Column EAdditionsBalance at
    
    Charged to
    
    Charged
    
    
    
    
    
    Balancebeginning
    
    cost and
    
    to other
    
    
    
    
    
    at end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    periodReserve for uncollectibles:2006
    
    $
    4,979
    
    
    $
    4,096
    
    
    $
    
    
    
    $
    3,478
    
    
    $
    5,5972005
    
    
    4,896
    
    
    
    2,638
    
    
    
    
    
    
    
    2,555
    
    
    
    4,9792004
    
    
    9,223
    
    
    
    2,868
    
    
    
    
    
    
    
    7,195
    
    
    
    4,896
 146




---



##### Table of Contents



ARIZONA PUBLIC SERVICE COMPANY
 
 SCHEDULE II  RESERVE FOR UNCOLLECTIBLES
 Column A
    
    Column B
    
    Column C
    
    Column D
    
    Column EAdditionsBalance at
    
    Charged to
    
    Charged
    
    
    
    
    
    Balancebeginning
    
    cost and
    
    to other
    
    
    
    
    
    at end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    periodReserve for uncollectibles:2006
    
    $
    3,568
    
    
    $
    4,096
    
    
    $
    
    
    
    $
    3,441
    
    
    $
    4,2232005
    
    
    3,444
    
    
    
    2,638
    
    
    
    
    
    
    
    2,514
    
    
    
    3,5682004
    
    
    3,743
    
    
    
    2,446
    
    
    
    
    
    
    
    2,745
    
    
    
    3,444
 147




---



##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  et seq
         148




---



##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM
10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE OF PINNACLE WEST
   
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
  149




---



##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
 Pinnacle West
  APS
  Type of Service
    
    2005
    
    2006Audit Fees (1)
    
    $
    2,167,319
    
    
    $
    1,925,550Audit-Related Fees (2)
    
    
    33,899
    
    
    
    167,912Tax Fees (3)
    
    
    1,025
    
    
    
    17,096
 
 (1)
    
    The aggregate fees billed for services rendered for the audit of annual financial statements
and for review of financial statements included in Forms 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 in 2006.(3)
    
    The aggregate fees billed primarily for investment tax credit services, tax compliance and
tax planning.
  150




---



##### Table of Contents



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 July
29, 1988
    
    19.1 to Pinnacle Wests September 30,
1988 Form 10-Q Report, File No. 1-8962
    
    11-14-883.2
    
    Pinnacle West
    
    Pinnacle West
Capital Corporation
Bylaws, amended as
of December 14,
2005
    
    3.1 to Pinnacle West/APS December 9,
2005 Form 8-K Report
    
    12-15-053.3
    
    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 June 23, 2004
    
    3.1 to APS June 30, 2004 Form 10-Q
Report, File No. 1-4473
    
    8-9-044.1
    
    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
    
    3-30-94
 151




---



##### 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,
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
    
    1-11-954.3
    
    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
    
    1-11-954.4
    
    Pinnacle West
APS
    
    Indenture dated as
of November 15,
1996 among 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
    
    11-22-964.5
    
    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
    
    11-22-964.6
    
    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
    
    4-9-974.7
    
    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
    
    5-15-034.8
    
    Pinnacle West
    
    Indenture dated as
of December 1, 2000
between the Company
and The Bank of New
York, as Trustee,
relating to Senior
Debt Securities
    
    4.1 to Pinnacle Wests Registration
Statement No. 333-52476
    
    12-21-00
 152




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed4.9
    
    Pinnacle West
    
    First Supplemental
Indenture dated as
of March 15, 2001
    
    4.1 to Pinnacle Wests Registration
Statement No. 333-52476 by means of
March 26, 2001 Form 8-K Report, File No.
1-8962
    
    3-26-014.10
    
    Pinnacle West
    
    Second Supplemental
Indenture dated as
of November 1, 2003
    
    4.20 to Pinnacle Wests Registration
Statement No. 333-101457 by means of
November 6, 2003 Form 8-K Report, File
No. 1-8962
    
    11-12-034.11
    
    Pinnacle West
    
    Indenture dated as
of December 1, 2000
between the Company
and The Bank of New
York, as Trustee,
relating to
subordinated Debt
Securities
    
    4.2 to Pinnacle Wests Registration
Statement No. 333-52476
    
    12-21-004.12
    
    Pinnacle West
    
    Specimen
Certificate of
Pinnacle West
Capital Corporation
Common Stock, no
par value
    
    4.2 to Pinnacle Wests 1988 Form 10-K
Report, File No. 1-8962
    
    3-31-894.13
    
    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
    
    3-30-884.14
    
    Pinnacle West
APS
    
    Indenture dated as
of January 15, 1998
among APS and 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
    
    1-16-98
 153




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed4.15
    
    Pinnacle West
APS
    
    First Supplemental
Indenture dated as
of January 15, 1998
    
    4.3 to APS Registration Statement Nos.
333-15379 and 333-27551 by means of
January 13, 1998 Form 8-K Report, File
No. 1-4473
    
    1-16-984.16
    
    Pinnacle West
APS
    
    Second Supplemental
Indenture dated as
of February 15,
1999
    
    4.3 to APS Registration Statement Nos.
333-27551 and 333-58445 by means of
February 18, 1999 Form 8-K Report, File
No. 1-4473
    
    2-22-994.17
    
    Pinnacle West
APS
    
    Third Supplemental
Indenture dated as
of November 1, 1999
    
    4.5 to APS Registration Statement Nos.
333-58445 by means of November 2, 1999
Form 8-K Report, File No. 1-4473
    
    11-5-994.18
    
    Pinnacle West
APS
    
    Fourth Supplemental
Indenture dated as
of August 1, 2000
    
    4.1 to APS Registration Statement No.
333-58445 and 333-94277 by means of
August 2, 2000 Form 8-K Report, File No.
1-4473
    
    8-4-004.19
    
    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
    
    11-6-014.20
    
    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
    
    2-28-024.21
    
    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
 154




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed4.22
    
    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
    
    6-28-044.23
    
    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
    
    8-22-054.24
    
    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
    
    4-19-994.25
    
    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
    
    5-15-024.26
    
    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
    
    8-9-04
 155




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.1
    
    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
    
    3-15-0410.2
    
    Pinnacle West
APS
    
    Amendment No. 7 to
the 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
    
    3-15-0410.3
    
    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
    
    3-15-0410.4
    
    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
    
    10.6A to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.5
    
    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
    
    3-15-04
 156




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.6
    
    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
    
    11-14-9110.7
    
    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
    
    3-30-9510.8
    
    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
    
    3-30-9510.9
    
    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
    
    3-28-9710.10
    
    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
    
    3-28-97
 157




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.11
    
    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
    
    3-26-9210.12
    
    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
    
    3-30-9310.13
    
    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
    
    3-30-9510.14
    
    Pinnacle West
APS
    
    Amendment No. 3 to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of January
31, 1992
    
    10.1 to APS June 30, 1996 Form 10-Q
Report, File No. 1-4473
    
    8-9-96
 158




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.15
    
    Pinnacle West
APS
    
    Amendment No. 4 to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2)
dated as of January
31, 1992
    
    APS 10.5 to APS 1996 Form 10-K Report,
File No. 1-4473
    
    3-28-9710.16
    
    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
    
    5-15-0210.17
    
    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
    
    5-15-0210.18
    
    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
    
    5-15-0210.19
    
    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
    
    5-15-0210.20
    
    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
    
    8-8-91
 159




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.21
    
    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
    
    8-8-9110.22
    
    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
    
    3-29-9610.23
    
    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
    
    3-29-9610.24
    
    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
    
    3-29-9610.25
    
    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
    
    3-29-96
 160




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.26
    
    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
    
    3-13-8510.27
    
    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
    
    9-1-7710.28
    
    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
    
    9-1-7710.29
    
    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
    
    7-25-8510.30
    
    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
    
    9-1-7710.31
    
    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
    
    7-25-85
 161




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.32
    
    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
    
    9-1-7710.33
    
    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
    
    3-14-0110.34
    
    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
    
    7-25-8510.35
    
    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
    
    3-23-7010.36
    
    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
    
    3-23-7010.37
    
    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
    
    3-16-71
 162




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.38
    
    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
    
    3-8-8910.39
    
    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
 163




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.40
    
    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
    
    8-14-0010.41c
    
    Pinnacle West
APS
    
    Facility Lease,
dated as of August
1, 1986, between
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
    
    10-24-8610.42c
    
    Pinnacle West
APS
    
    Amendment No. 1,
dated as of
November 1, 1986,
to Facility Lease,
dated as of August
1, 1986, between
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
 164




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.43c
    
    Pinnacle West
APS
    
    Amendment No. 2
dated as of June 1,
1987 to 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
Lessor, and APS, as
Lessee
    
    10.3 to APS 1988 Form
10-K Report, File No. 1-4473
    
    3-8-8910.44c
    
    Pinnacle West
APS
    
    Amendment No. 3,
dated as of March
17, 1993, to
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
Lessor, and APS, as
Lessee
    
    10.3 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9310.45
    
    Pinnacle West
APS
    
    Facility Lease,
dated as of
December 15, 1986,
between 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
 165




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.46
    
    Pinnacle West
APS
    
    Amendment No. 1,
dated as of August
1, 1987, to
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
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
    
    8-24-8710.47
    
    Pinnacle West
APS
    
    Amendment No. 2,
dated as of March
17, 1993, to
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
Lessor, and APS, as
Lessee
    
    10.4 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9310.48b
    
    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
    
    3-13-0610.49b
    
    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
    
    3-30-00
 166




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.50b
    
    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
    
    3-30-0010.51b
    
    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
    
    8-13-8610.52b
    
    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
    
    3-30-9410.53b
    
    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
    
    11-10-9410.54b
    
    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
 167




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.55b
    
    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
    
    3-8-8910.56b
    
    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
    
    3-30-9410.57b
    
    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
    
    11-10-9410.58b
    
    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
    
    3-28-9710.59b
    
    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
    
    3-14-01
 168




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.60b
    
    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
    
    3-29-9610.61b
    
    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
    
    3-30-0010.62b
    
    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
    
    3-30-00
 169




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.63b
    
    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
    
    10.3 to Pinnacle Wests March 31, 2003
Form 10-Q Report, File No. 1-8962
    
    5-15-0310.64b
    
    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
    
    3-13-0610.65b
    
    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
    
    3-31-0310.66b
    
    Pinnacle West
APS
    
    Letter Agreement
dated July 28, 1995
between Arizona
Public Service
Company and Armando
B. Flores
    
    10.16A to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.67b
    
    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
    
    3-30-95
 170




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.68b
    
    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
    
    3-28-9710.69b
    
    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
    
    11-12-9710.70b
    
    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
    
    3-30-0010.71b
    
    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
    
    8-13-0210.72b
    
    Pinnacle West
APS
    
    Letter Agreement
dated October 3,
1997 between
Arizona Public
Service Company and
James M. Levine
    
    10.17A to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.73b
    
    Pinnacle West
APS
    
    Employment
Agreement dated
February 27, 2003
between APS and
James M. Levine
    
    10.1 to Pinnacle Wests March 31, 2003
Form 10-Q Report, File No. 1-8962
    
    5-15-0310.74b
    
    Pinnacle West
APS
    
    Summary of James M.
Levine Retirement
Benefits
    
    10.2 to Pinnacle Wests March 31, 2003
Form 10-Q Report, File No. 1-8962
    
    5-15-0310.75b
    
    Pinnacle West
APS
    
    Employment
Agreement,
effective as of
October 1, 2002,
between APS and
James M. Levine
    
    10.1 to Pinnacle Wests September 30,
2002 Form 10-Q Report, File No. 1-8962
    
    11-14-02
 171




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.75.1b
    
    Pinnacle West
APS
    
    Amendment to
Agreement between
APS and James M.
Levine effective
October 11, 2002
    
    10.2 to Pinnacle Wests September 30,
2004 Form 10-Q Report, File No. 1-8962
    
    11-8-0410.75.2b
    
    Pinnacle West
APS
    
    Second Amendment to
Agreement between
APS and James M.
Levine effective as
of 1-1-05
    
    10.79.2 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.76b
    
    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
    
    3-31-0310.77bd
    
    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
    
    3-13-0610.78b
    
    APS
    
    Letter Agreement
dated December 20,
2006 between APS
and Randall K.
Edington10.79b
    
    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
    
    4-15-9410.80b
    
    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
    
    3-30-00
 172




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.81b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.5A to Pinnacle Wests 2002 Form 10-K
Report
    
    3-31-0310.82b
    
    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
    
    7-3-0010.83
    
    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
    
    3-19-9210.84
    
    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
    
    5-15-9810.85
    
    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
    
    5-15-9810.86
    
    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
    
    5-15-9810.87
    
    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
    
    6-26-98
 173




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.88bd
    
    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
    
    12-15-0510.89bd
    
    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
    
    2-1-0610.90d
    
    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
    
    3-16-0510.91bd
    
    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
    
    3-16-0510.92bd
    
    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
    
    3-13-0610.93bd
    
    Pinnacle West
APS
    
    Summary of 2006 CEO
Variable Incentive
Plan and Officer
Variable Incentive
Plan
    
    10.92 to Pinnacle West/APS 2005 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-13-06
 174




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.94
    
    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
    
    3-16-0510.95
    
    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
    
    3-16-0510.96
    
    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
    
    3-13-0610.97
    
    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
    
    3-13-06
 175




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.98
    
    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
    
    3-13-0610.99
    
    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
    
    8-8-0610.100
    
    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
    
    3-16-05
 176




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.101
    
    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
    
    3-16-0510.102
    
    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
    
    3-16-0510.103
    
    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
    
    3-16-0510.104
    
    Pinnacle West
APS
    
    Asset Purchase
Agreement by and
between PPL
Sundance Energy,
LLC, as Seller, and
APS, as Purchaser,
dated as of June 1,
2004
    
    10.1 to Pinnacle Wests June 2004 Form
10-Q Report, File No. 1-8962
    
    8-9-0410.104.1
    
    Pinnacle West
APS
    
    Amendment to Asset
Purchase Agreement
dated as of
December 14, 2004
between PPL
Sundance Energy,
LLC and APS
    
    99.1 to Pinnacle Wests November 18,
2004 Form 8-K Report, File No. 1-8962
    
    12-20-0410.105
    
    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
    
    11-8-04
 177




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.106b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
and Arizona Public
Service Company
Directors
Retirement Plan, as
amended and
restated on June
21, 2000
    
    99.2 to Pinnacle Wests Registration
Statement on Form S-8 No. 333-40796,
File No. 1-8962
    
    7-3-0010.107
    
    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
    
    3-19-9210.108
    
    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
    
    3-13-06
 178




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed10.109
    
    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
    
    3-13-0610.110
    
    APS
    
    $500,000,000 Five-Year Credit
Agreement dated as
of September 29,
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
    
    11-8-0612.1
    
    Pinnacle West
    
    Ratio of Earnings
to Fixed Charges12.2
    
    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 LLP
 179




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed23.2
    
    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
Donald E. Brandt,
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 Jack
E. Davis, Chief
Executive Officer,
pursuant to Rule
13a-14(a) and Rule
15d-14(a) of the
Securities Exchange
Act, as amended31.4
    
    APS
    
    Certificate of
Donald E. Brandt,
Chief Financial
Officer, pursuant
to Rule 13a-14(a)
and Rule 15d-14(a)
of the Securities
Exchange Act, as
amended
 180




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed32.1
    
    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
    
    3-30-9399.2
    
    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
 181




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.3c
    
    Pinnacle West
APS
    
    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
    
    28.1 to APS September 30, 1992 Form
10-Q Report, File No. 1-4473
    
    11-9-9299.4c
    
    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
 182




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.5c
    
    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
    
    3-30-9399.6c
    
    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
 183




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.7c
    
    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
    
    12-4-8699.8c
    
    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
    
    3-30-9399.9c
    
    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
 184




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.10c
    
    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
    
    12-4-8699.11c
    
    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
    
    3-30-9399.12
    
    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
 185




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.13
    
    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
    
    8-10-8799.14
    
    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
 186




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.15
    
    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
    
    1-20-8799.16
    
    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
 187




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.17
    
    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
    
    3-30-9399.18
    
    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
    
    1-20-8799.19
    
    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
    
    3-30-9399.20c
    
    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
 188




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.21
    
    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
    
    8-10-8799.22
    
    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
    
    11-15-9999.23
    
    Pinnacle West
APS
    
    ACC Decision No.
65796 dated April
4, 2003 (Financing
Order)
    
    99.3 to Pinnacle Wests March 31, 2003
Form 10-Q Report, File No. 1-8962
    
    5-15-0399.24
    
    Pinnacle West
APS
    
    Proposed Settlement
of Docket
E-01345A-03-0437,
APS Request for
Rate Adjustment,
dated August 18,
2004
    
    99.1 to Pinnacle Wests August 18, 2004
Form 8-K Report, File No. 1-8962
    
    8-18-0499.25
    
    Pinnacle West
APS
    
    Opinion and Order,
ACC Decision No.
67744 dated April
7, 2005 (see
Exhibit 99.24
herein for
Attachment A to the
Opinion and Order,
the 2004 Settlement
Agreement)
    
    99.5 to Pinnacle West/APS March 31, 2005
Form 10-Q Report, File Nos. 1-8962 and
1-4473
    
    5-9-05
 189




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.26
    
    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
    
    8-9-0599.27
    
    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
    
    8-9-0599.28
    
    Pinnacle West
APS
    
    Application for
Emergency Interim
Rate Increase and
Interim Amendment
to Decision No.
67744
    
    99.1 to Pinnacle West/APS January 6,
2006 Form 8-K Report, File Nos. 1-8962
and 1-4473
    
    1-9-0699.29
    
    Pinnacle West
    
    Non-GAAP Financial
Measure
Reconciliation 
Operating Income
(GAAP measure) to
Gross Margin
(non-GAAP financial
measure)
 190




---



##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Filed99.30
    
    APS
    
    Non-GAAP Financial
Measure
Reconciliation 
Operating Income
(GAAP measure) to
Gross Margin
(non-GAAP financial
measure)
 
 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. 191




---



##### Table of Contents



SIGNATURES
  PINNACLE WEST CAPITAL CORPORATION(Registrant)Date:
February 28, 2007
    
    /s/ William J. Post(William J. Post, Chairman of theBoard of Directors and ChiefExecutive 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 28, 2007/s/ Jack E. Davis
(Jack
E. Davis, President
and Chief Operating Officer)
    
    Director
    
    February 28, 2007/s/ Donald
E. Brandt
(Donald
E. Brandt,
Executive Vice President and
Chief Financial Officer)
    
    Principal Accounting Officer
and Principal Financial Officer
    
    February 28, 2007
 192




---



##### Table of Contents



Signature
    
    Title
    
    Date/s/ Edward N. Basha, Jr.
(Edward
N. Basha, Jr.)
    
    Director
    
    February 28, 2007/s/ Michael
L. Gallagher
(Michael
L. Gallagher)
    
    Director
    
    February 28, 2007/s/ Pamela
Grant
(Pamela
Grant)
    
    Director
    
    February 28, 2007/s/ Roy
A. Herberger, Jr.
(Roy
A. Herberger, Jr.)
    
    Director
    
    February 28, 2007/s/ Martha
O. Hesse
(Martha
O. Hesse)
    
    Director
    
    February 28, 2007/s/ William
S. Jamieson, Jr.
(William
S. Jamieson, Jr.)
    
    Director
    
    February 28, 2007/s/ Humberto
S. Lopez
(Humberto
S. Lopez)
    
    Director
    
    February 28, 2007/s/ Kathryn
L. Munro
(Kathryn
L. Munro)
    
    Director
    
    February 28, 2007/s/ Bruce
J. Nordstrom
(Bruce
J. Nordstrom)
    
    Director
    
    February 28, 2007/s/ William
L. Stewart
(William
L. Stewart)
    
    Director
    
    February 28, 2007
 193




---



##### Table of Contents



SIGNATURES
  ARIZONA PUBLIC SERVICE COMPANY(Registrant)Date:
February 28, 2007
    
    /s/ Jack E. Davis(Jack E. Davis, Chief
Executive Officer)
 Power of Attorney
   Signature
    
    Title
    
    Date/s/ William
J. Post
(William
J. Post, Chairman
of the Board of Directors )
    
    Director
    
    February 28, 2007/s/ Jack
E. Davis
(Jack
E. Davis,
Chief Executive Officer)
    
    Principal Executive Officer
and Director
    
    February 28, 2007/s/ Donald
E. Brandt
(Donald
E. Brandt,
President and Chief
Financial Officer)
    
    Principal Financial Officer
    
    February 28, 2007/s/ Chris
N. Froggatt
(Chris
N. Froggatt,
Vice President and Controller)
    
    Principal Accounting Officer
    
    February 28, 2007
 194




---



##### Table of Contents



Signature
    
    Title
    
    Date/s/ Edward
N. Basha, Jr.
(Edward
N. Basha, Jr.)
    
    Director
    
    February 28, 2007/s/ Michael
L. Gallagher
(Michael
L. Gallagher)
    
    Director
    
    February 28, 2007/s/ Pamela
Grant
(Pamela
Grant)
    
    Director
    
    February 28, 2007/s/ Roy
A. Herberger, Jr.
(Roy
A. Herberger, Jr.)
    
    Director
    
    February 28, 2007/s/ Martha
O. Hesse
(Martha
O. Hesse)
    
    Director
    
    February 28, 2007/s/ William
S. Jamieson, Jr.
(William
S. Jamieson, Jr.)
    
    Director
    
    February 28, 2007/s/ Humberto
S. Lopez
(Humberto
S. Lopez)
    
    Director
    
    February 28, 2007/s/ Kathryn
L. Munro
(Kathryn
L. Munro)
    
    Director
    
    February 28, 2007/s/ Bruce
J. Nordstrom
(Bruce
J. Nordstrom)
    
    Director
    
    February 28, 2007/s/ William
L. Stewart
(William
L. Stewart)
    
    Director
    
    February 28, 2007
 195




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Registrant(s)
    
    Description10.78a
    
    APS
    
    Letter Agreement
dated December 20,
2006 between APS
and Randall K.
Edington12.1
    
    Pinnacle West
    
    Ratio of Earnings
to Fixed Charges12.2
    
    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
Donald E. Brandt,
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 Jack
E. Davis, Chief
Executive Officer,
pursuant to Rule
13a-14(a) and Rule
15d-14(a) of the
Securities Exchange
Act, as amended31.4
    
    APS
    
    Certificate of
Donald E. Brandt,
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 200299.29
    
    Pinnacle West
    
    Non-GAAP Financial
Measure
Reconciliation 
Operating Income
(GAAP measure) to
Gross Margin
(non-GAAP financial
measure)99.30
    
    APS
    
    Non-GAAP Financial
Measure
Reconciliation 
Operating Income
(GAAP measure) to
Gross Margin
(non-GAAP financial
measure)
 
 a
    
    Management contract or compensatory plan or arrangement to be filed as an exhibit
pursuant to Item 15(b) of Form 10-K.