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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 _________________ FORM 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
 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:None. Indicate by check mark whether each registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or in any amendment to this Form 10-K. o Indicate by check mark whether each registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). PINNACLE WEST CAPITAL CORPORATION
    
    Yes x
    
    No oARIZONA PUBLIC SERVICE COMPANY
    
    Yes o
    
    No þ
 State the aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the last business day of each registrants
most recently completed second fiscal quarter: PINNACLE WEST CAPITAL CORPORATION
    
    $3,673,440,593 as of June 30, 2004ARIZONA PUBLIC SERVICE COMPANY
    
    $0 as of June 30, 2004
 The number of shares
outstanding of each registrants common stock as of March 14, 2005 PINNACLE WEST CAPITAL CORPORATION
    
    92,080,964 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.
 
 DOCUMENTS INCORPORATED BY REFERENCE   
 Arizona Public Service Company meets the conditions set forth in General Instruction I(1)(a)
and (b) ofForm 10-Kand is therefore filing this form with the reduced disclosure format allowed
under that General Instruction. This combined Form 10-K is separately filed by Pinnacle West Capital Corporation and Arizona
Public Service Company. Each registrant is filing on its own behalf all of the information
contained in this Form 10-K that relates to such registrant. Neither registrant is filing any
information that does not relate to such registrant, and therefore makes no representation as to
any such information.




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TABLE OF CONTENTS PageGLOSSARY
    
    1PART I
    
    4Item 1.
    
    Business
    
    4Item 2.
    
    Properties
    
    19Item 3.
    
    Legal Proceedings
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    24Supplemental Item.Executive Officers of Pinnacle West
    
    25PART II
    
    27Item 5.
    
    Market for Registrants Common Equity, Pinnacle West Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    27Item 6.
    
    Selected Financial Data
    
    28Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    30Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk.
    
    62Item 8.
    
    Financial Statements and Supplementary Data
    
    63Item 9.
    
    Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    148Item 9A.
    
    Controls and Procedures
    
    148Item 9B.
    
    Other Information
    
    149PART III
    
    149Item 10.
    
    Directors and Executive Officers of Pinnacle West
    
    149Item 11.
    
    Executive Compensation
    
    149Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    149Item 13.
    
    Certain Relationships and Related Transactions
    
    152Item 14.
    
    Principal Accountant Fees and Services
    
    152PART IV
    
    153Item 15.
    
    Exhibits and Financial Statement Schedules
    
    153SIGNATURES
    
    191Exhibit 10.1Exhibit 10.79.2Exhibit 10.95Exhibit 10.96Exhibit 10.97Exhibit 10.98Exhibit 10.99Exhibit 10.100Exhibit 10.101Exhibit 10.102Exhibit 10.103Exhibit 10.104Exhibit 10.105Exhibit 12.1Exhibit 12.2Exhibit 21.1Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 31.3Exhibit 31.4Exhibit 32.1Exhibit 32.2Exhibit 99.31Exhibit 99.32
  i




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GLOSSARY ACC  Arizona Corporation Commission ADEQ  Arizona Department of Environmental Quality AFUDC  allowance for funds used during construction AISA  Arizona Independent Scheduling Administrator ALJ  Administrative Law Judge ANPP  Arizona Nuclear Power Project, also known as Palo Verde APS  Arizona Public Service Company, a subsidiary of the Company APS Energy Services  APS Energy Services Company, Inc., a subsidiary of the Company CC&N  Certificate of Convenience and Necessity Cholla  Cholla Power Plant Citizens  Citizens Communications Company Clean Air Act  Clean Air Act, as amended Company  Pinnacle West Capital Corporation CPUC  California Public Utility Commission DOE  United States Department of Energy EITF  FASBs Emerging Issues Task Force El Dorado  El Dorado Investment Company, a subsidiary of the Company EPA  United States Environmental Protection Agency ERMC  Energy Risk Management Committee FASB  Financial Accounting Standards Board FERC  United States Federal Energy Regulatory Commission FIN  FASB Interpretation Financing Order  ACC Order that authorized APS $500 million loan to Pinnacle West Energy in May
2003 FIP  Federal Implementation Plan Four Corners  Four Corners Power Plant FSP  FASB Staff Position GAAP  accounting principles generally accepted in the United States of America IRS  United States Internal Revenue Service ISO  California Independent System Operator kW  kilowatt, one thousand watts kWh  kilowatt-hour, one thousand watts per hour




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Moodys  Moodys Investors Service MW  megawatt, one million watts MWh  megawatt-hours, one million watts per hour NAC  collectively, NAC Holding Inc. and NAC International Inc., subsidiaries of El Dorado that
were sold in November 2004 Native Load  retail and wholesale sales supplied under traditional cost-based rate regulation 1999 Settlement Agreement  comprehensive settlement agreement related to the implementation of
retail electric competition NRC  United States Nuclear Regulatory Commission Nuclear Waste Act  Nuclear Waste Policy Act of 1982, as amended OCI  other comprehensive income Palo Verde  Palo Verde Nuclear Generating Station, also known as ANPP PG&E  PG&E
Corporation Pinnacle West  Pinnacle West Capital Corporation, the Company Pinnacle West Energy  Pinnacle West Energy Corporation, a subsidiary of the Company PPL Sundance  PPL Sundance Energy, LLC PRP  potentially responsible parties under the Superfund Act PSA  power supply
adjuster PWEC Dedicated Assets  the following Pinnacle West Energy power plants, each of which is dedicated
to serving APS customers: Redhawk Units 1 and 2, West Phoenix Units 4 and 5 and Saguaro Unit 3 PX  California Power Exchange RFP  request for proposals RTO  regional transmission organization Rules  ACC retail electric competition rules Salt River Project  Salt River Project Agricultural Improvement and Power District SCE  Southern California Edison Company SEC  United States Securities and Exchange Commission SFAS  Statement of Financial Accounting Standards SIP  State Implementation Plan SNWA  Southern Nevada Water Authority Spark Spread  Excess of
market power price over market gas price at a specific location 2




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SPE  special-purpose entity Standard & Poors  Standard & Poors Corporation SunCor  SunCor Development Company, a subsidiary of the Company Sundance Plant  PPL Sundances 450-megawatt generating facility located approximately 55 miles
southeast of Phoenix, Arizona Superfund  Comprehensive Environmental Response, Compensation and Liability Act T&D  transmission and distribution Track A Order  ACC order dated September 10, 2002 regarding generation asset transfers and related
issues Track B Order  ACC order dated March 14, 2003 regarding competitive solicitation requirements for
power purchases by Arizonas investor-owned electric utilities Trading  energy-related activities entered into with the objective of generating profits on
changes in market prices 2004 Settlement Agreement  an agreement proposing terms under which APS general rate case would
be settled VIE  variable interest entity WestConnect  WestConnect RTO, LLC, a proposed RTO to be formed by owners of electric transmission
lines in the southwestern United States 3




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INTRODUCTION Filing Format This Annual Report on Form 10-K is a combined report being filed by two separate registrants:
Pinnacle West and APS. The information required with respect to each company is set forth within
the applicable items. The Managements Discussion and Analysis of Financial Condition and Results of Operations
included under Item 7 of this report is divided into the following two sections:  
    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. Item 8 of this report includes Consolidated Financial Statements of Pinnacle West and
Financial Statements of APS. Item 8 also includes Notes to Pinnacle Wests Consolidated Financial
Statements, the majority of which also relate to APS, and Supplemental Notes to APS Financial
Statements. 
 PART I 
 ITEM 1. BUSINESS OVERVIEW General Pinnacle West was incorporated in 1985 under the laws of the State of Arizona and owns all of
the outstanding equity securities of APS, its major subsidiary. APS is a vertically-integrated
electric utility that provides either retail or wholesale electric service to most of the state of
Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson
metropolitan area and Mohave County in northwestern Arizona. Through its marketing and trading
division, APS also generates, sells and delivers electricity to wholesale customers in the western
United States. Pinnacle Wests other significant subsidiaries are Pinnacle West Energy, which owns and
operates unregulated generating plants; APS Energy Services, which provides competitive energy
services and products in the western United States; and SunCor, which is engaged in real estate
development activities. Each of these subsidiaries is discussed in greater detail below. See
Business of Pinnacle West Energy Corporation, Business of APS Energy Services Company, Inc.
and Business of SunCor Development Company in this Item 1. 4




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Business Segments Pinnacle West has three principal business segments (determined by products, services and the
regulatory environment):  
    the regulated electricity segment (70% of operating revenues in 2004), 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;
    the marketing and trading segment (16% of operating revenues in 2004), which
consists of competitive energy business activities, including wholesale marketing and
trading and APS Energy Services commodity-related energy services; and
    the real estate segment (12% of operating revenues in 2004), which consists of
SunCors real estate development and investment activities. See Note 17 of Notes to Pinnacle Wests Consolidated Financial Statements in Item 8 for
financial information about the business segments. APS General Rate Case APS general rate case pending before the ACC is the key issue affecting Pinnacle Wests and
APS outlook. As discussed in greater detail in Note 3 of Notes to Pinnacle Wests Consolidated
Financial Statements in Item 8, on August 18, 2004, a substantial majority of the parties to the
rate case, including APS, the ACC staff, the Arizona Residential Utility Consumer Office, other
customer and advocacy groups, and merchant power plant intervenors entered into the 2004 Settlement
Agreement, which proposes terms under which the rate case would be settled. On
February 28, 2005, the administrative law judge issued a
recommended order, proposing ACC approval of the 2004 Settlement
Agreement with two changes related to the PSA.
On March 14, 2005, the parties to the 2004 Settlement Agreement jointly filed
 suggested changes to the recommended order addressing, among other things, the recommended
orders proposed treatment of the PSA. The
ACC has scheduled open meetings on March 25 and March 28, 2005 to consider  the recommended order and
suggested changes. APS cannot predict the outcome of this matter. Employees At December 31, 2004, Pinnacle West employed about 7,200 people, including the employees of
its subsidiaries. Of these employees, about 6,100 were employees of APS, including employees at
jointly-owned generating facilities for which APS serves as the generating facility manager. About
1,100 people were employed by Pinnacle West and its other subsidiaries. Pinnacle Wests principal
executive offices are located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone
602-250-1000). Available Information Pinnacle West makes available free of charge on or through its internet site,
(www.pinnaclewest.com) the following filings as soon as reasonably practicable after they are
electronically filed with, or furnished to, the SEC: its Annual Report on Form 10-K, its Quarterly
Reports on Form 10-Q, its Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. 5




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Pinnacle West also has a Corporate Governance webpage. You can access Pinnacle Wests
Corporate Governance webpage through its internet site, www.pinnaclewest.com,by clicking on the
About Us link to the heading Corporate Commitments. Pinnacle West posts the following on its
Corporate Governance webpage:  
    Corporate Governance Guidelines;
    Board Committee Summary;
    Charters for Pinnacle Wests Audit Committee, Corporate Governance Committee,
Finance and Operating Committee and Human Resources Committee;
    Code of Ethics for Financial Professionals; and
    Ethics Policy and Standards of Business Practices. Pinnacle West will post any amendments to the Code of Ethics and Ethics Policy and Standards
of Business Practices, and any waivers that are required to be disclosed by the rules of either the
SEC or the New York Stock Exchange, on its internet site. The information on Pinnacle Wests
internet site is not incorporated by reference into this report. You can request a copy of these documents by contacting Pinnacle West at the following
address: Pinnacle West Capital Corporation, Office of the Secretary, Station 9068, P.O. Box 53999,
Phoenix, Arizona 85072-3999 (telephone 602-250-3252) . Forward-Looking Statements This document contains forward-looking statements based on current expectations, and neither
Pinnacle West nor APS assumes any obligation to update these statements or make any further
statements on any of these issues, except as required by applicable law. These forward-looking
statements are often identified by words such as estimate, predict, hope, may, believe,
anticipate, plan, expect, require, intend, assume and similar words. Because actual
results may differ materially from expectations, we caution readers not to place undue reliance on
these statements. A number of factors could cause future results to differ materially from
historical results, or from results or outcomes currently expected or sought by Pinnacle West or
APS. In addition to the Risk Factors described in Exhibits 99.31 and 99.32 to this report, these
factors include, but are not limited to:  
    state and federal regulatory and legislative decisions and actions, including the
outcome of the rate case APS filed with the ACC on June 27, 2003 and the wholesale
electric price mitigation plan adopted by the FERC;
    the outcome of regulatory, legislative and judicial proceedings relating to the
restructuring;
    the ongoing restructuring of the electric industry, including the introduction of
retail electric competition in Arizona and decisions impacting wholesale competition;
    market prices for electricity and natural gas;
    power plant performance and outages, including transmission outages and constraints;
    weather variations affecting local and regional customer energy usage;
    customer growth and energy usage; 6




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
    regional economic and market conditions, including the results of litigation and
other proceedings resulting from the California energy situation, volatile purchased
power and fuel costs and the completion of generation and transmission 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;
    the uncertainty that current credit ratings will remain 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 amount of required contributions to Pinnacle Wests pension plan and
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 The ACC regulates APS retail electric rates and its issuance of securities. The ACC must
also approve any transfer of APS property used to provide retail electric service and approve or
receive prior notification of certain transactions between Pinnacle West, APS and their respective
affiliates. See Note 3 of Notes to Pinnacle Wests Consolidated Financial Statements in Item 8 for
a discussion of the status of electric industry restructuring in Arizona. The electric utility industry has undergone significant regulatory change in the last few
years regarding competition in the sale of electricity and related services. However, many states,
including Arizona, have reexamined retail electric competition. As of January 1, 2001, all of APS retail customers were eligible to choose alternate energy
suppliers. However, there are currently no active retail competitors offering unbundled energy or
other utility services to APS customers. As a result, APS cannot predict when, and the extent to
which, additional competitors will re-enter APS service territory. Also, regulatory developments
and legal challenges to the Rules have raised considerable uncertainty about the status and pace of
retail electric competition and of electric restructuring in Arizona. See Retail Electric
Competition Rules in Note 3 of Notes to Pinnacle Wests Consolidated Financial Statements in Item
8 for additional information. 7




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APS is subject to varying degrees of competition from other investor-owned utilities in
Arizona (such as Tucson Electric Power Company and Southwest Gas Corporation) as well as
cooperatives, municipalities, electrical districts and similar types of governmental or non-profit
organizations (principally Salt River Project). APS also faces competition from low-cost,
hydroelectric power and parties that have access to low-priced preferential, federal power and
other governmental subsidies. In addition, some customers, particularly industrial and large
commercial customers, may own and operate generation facilities to meet their own energy
requirements. Wholesale General The FERC regulates rates for wholesale power sales and transmission services. During 2004,
approximately 9.4% of APS electric operating revenues resulted from such sales and services. In
early 2003, Pinnacle West moved its marketing and trading division to APS for all future marketing
and trading activities (existing wholesale contracts remained at Pinnacle West) as a result of the
ACCs Track A Order prohibiting the previously required transfer of APS generating assets to
Pinnacle West Energy (see Track A Order in Note 3 of Notes to Pinnacle Wests Consolidated
Financial Statements in Item 8). The marketing and trading division focuses primarily on managing APS purchased power and fuel
risks in connection with its costs of serving retail customer energy requirements. The division
also sells, in the wholesale market, APS and Pinnacle West Energy generation output that is not
needed for APS Native Load and, in doing so, competes with other utilities, power marketers and
independent power producers. Additionally, the marketing and trading division, subject to
specified parameters, markets, hedges and trades in electricity, fuels and emissions allowances and
credits. Market-Based Rate Proceeding On August 11, 2004, Pinnacle West, APS, Pinnacle West Energy and APS Energy Services
(collectively, the Pinnacle West Companies) submitted to
the FERC an update to their three-year
market-based rate review, pursuant to the FERCs order implementing a new generation market
power analysis. On December 20, 2004, the FERC issued an order approving the Pinnacle West
Companies market-based rates for control areas other than those of APS, Public Service Company of
New Mexico and Tucson Electric Power Company. With respect to these three control areas, the FERC
required that the Pinnacle West Companies submit additional data, and on February 18, 2005, the
Pinnacle West Companies made such a filing. To the extent the FERC does not permit the Pinnacle
West Companies to make sales at market-based rates in these control areas, the Pinnacle West
Companies will still be permitted to make sales at cost-based rates in the three control areas. We
cannot currently predict the outcome of this proceeding, but we do
not believe that having such sales
limited to cost-based rates will have a material adverse effect on our financial position, results of
operations or liquidity. Regional Transmission Organizations FederalIn a December 1999 order, the FERC established characteristics and functions that
must be met by utilities in forming and operating RTOs. The characteristics for an acceptable RTO
include independence from market participants, operational control over a region large enough to 8




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support efficient and nondiscriminatory markets and exclusive authority to maintain short-term
reliability. Additionally, in a pending notice of proposed rulemaking, the FERC is considering
implementing a standard market design for wholesale markets. On October 16, 2001, APS and other owners of electric transmission lines in the southwestern
U.S. filed with the FERC a request for a declaratory order confirming that their proposal to form
WestConnect RTO, LLC would satisfy the FERCs requirements for the formation of an RTO. On October
10, 2002, the FERC issued an order finding that the WestConnect proposal, if modified to address
specified issues, could meet the FERCs RTO requirements and provide the basic framework for a
standard market design for the southwestern U.S. See Arizona Public Service Co., 101 FERC ¶
61,033, order on rehg, 101 FERC ¶ 61,350, order on rehg, 104 FERC ¶ 61,285 (2003). Since that
time, APS has been evaluating a phased approach to RTO implementation in the desert Southwest. APS
is currently participating with other entities in the southwestern U.S. in a cost/benefit analysis
of implementing the WestConnect RTO, the results of which are expected to be completed in 2005. If APS ultimately joins an RTO, APS could incur increased transmission-related costs and
receive reduced transmission service revenues; APS may be required to expand its transmission
system according to decisions made by the RTO rather than its internal planning process; and APS
may experience other impacts on its operations, cash flows or financial position that will not be
quantifiable until the final tariffs and other material terms of the RTO are known. StateThe ACCs retail electric competition Rules require the formation and implementation of
an Arizona Independent Scheduling Administrator. The purpose of the AISA is to oversee the
application of operating protocols to ensure statewide consistency for transmission access. The
AISA is anticipated to be a temporary organization until the implementation of an independent
system operator or RTO. APS participated in the creation of the AISA, a not-for-profit entity, and
the filing at the FERC for approval of its operating protocols. An ACC proceeding reviewing the
AISA is still pending. BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY General APS was incorporated in 1920 under the laws of the State of Arizona and currently has more
than 989,500 customers. APS does not distribute any products. During 2004, no single purchaser or
user of energy (other than Pinnacle West) accounted for more than 6.2% of electric revenues. See
Overview  General and Regulation and Competition above for additional
background information about APS business. At December 31, 2004, APS employed approximately 6,100 people, including employees at
jointly-owned generating facilities for which APS serves as the generating facility manager. APS
principal executive offices are located at 400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona
85072-3999 (telephone 602-250-1000). Purchased Power and Generating Fuel See Properties  Capacity in Item 2 for information about APS and Pinnacle Wests power
plants by fuel types. 9




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2004 Energy Mix Pinnacle Wests consolidated sources of energy during 2004 were: purchased power  56.9%; coal  20.8%; nuclear  13.5%; gas  8.7%; and other (includes oil, hydro
and solar)  0.1%. In accordance with GAAP, a substantial
portion of our purchased power contracts was netted against wholesale
sales contracts on the Consolidated Statements of Income. See Note 18 of Notes to Pinnacle Wests Consolidated Financial
Statements in Item 8. APS
sources of energy during 2004 were: purchased power  62.9%; coal  21.4%; nuclear  13.9%; gas  1.7%; and other
(includes oil, hydro and solar)  0.1%. In accordance with GAAP, a substantial
portion of our purchased power contracts was netted against wholesale
sales contracts on the Statements of Income. See Note 18 of Notes to Pinnacle Wests Consolidated Financial
Statements in Item 8. Coal Supply ChollaCholla is a coal-fired power plant located in northeastern Arizona. It is a
jointly-owned facility operated by APS. APS purchases most of Chollas coal requirements from a
coal supplier that mines all of the coal under a long-term lease of coal reserves with the Navajo
Nation, the federal government and private landholders. Cholla has sufficient coal under current
contracts to ensure a reliable fuel supply through 2007. These contracts include expected
requirements for low sulfur coal, which is required for certain limited operating conditions;
however, if necessary, low sulfur coal may be purchased on the open market. APS may purchase a
portion of Chollas coal requirements on the spot market to take advantage of competitive pricing
options and to supplement coal required for increased operating capacity. Following expiration of
current contracts, APS believes that competitive fuel supply options will exist to ensure the
continued operation of Cholla for its useful life, and has evaluated the necessary plant
modifications and operational requirements to convert to other fuel sources. Four CornersFour Corners is a coal-fired power plant located in the northwestern corner of
New Mexico. It is a jointly-owned facility operated by APS. APS purchases all of Four Corners
coal requirements from a supplier with a long-term lease of coal reserves with the Navajo Nation.
The Four Corners coal contract runs through July 2016, with options to extend the contract for five
to fifteen additional years beyond the current plant site lease expiration in 2017. Navajo Generating StationThe Navajo Generating Station is a coal-fired power plant located
in northern Arizona. It is a jointly-owned facility operated by Salt River Project. The Navajo
Generating Stations coal requirements are purchased from a supplier with long-term leases from the
Navajo Nation and the Hopi Tribe. The Navajo Generating Station is under contract with its coal
supplier through 2011, with options to extend through the current plant site lease expiration in
2019. The Navajo Generating Station lease waives certain taxes through the lease expiration in
2019. Items that may impact the fuel price include lease provisions that allow for a
renegotiation of the coal royalty in 2007 and 2017 and a fuel contract requirement for a five-year
price review in 2007. In addition, the potential closure of the Mohave Generating Station will
impact the cost structure for the Black Mesa  Kayenta Mine complex, and may increase costs to the
Navajo Generating Station, which is served by the Kayenta Mine. See Legal Proceedings in Item 3 for information about a lawsuit relating to royalties for
coal paid by the participants at the Navajo Generating Station. 10




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See Properties  Capacity in Item 2 for information about APS ownership interests in
Cholla, Four Corners and the Navajo Generating Station. See Note 11 of Notes to Pinnacle Wests
Consolidated Financial Statements in Item 8 for information regarding APS coal mine reclamation
obligations. Natural Gas Supply See Note 11 of Notes to Pinnacle Wests Consolidated Financial Statements in Item 8 for a
discussion of APS and Pinnacle Wests natural gas requirements. Nuclear Fuel Supply Palo Verde Fuel CyclePalo Verde is a nuclear power plant located about 50 miles west of
Phoenix, Arizona. It is a jointly-owned facility operated by APS. The fuel cycle for Palo Verde
is comprised of the following stages:  
    mining and milling of uranium ore to produce uranium concentrates;
    conversion of uranium concentrates to uranium hexafluoride;
    enrichment of uranium hexafluoride;
    fabrication of fuel assemblies;
    utilization of fuel assemblies in reactors; and
    storage and disposal of spent nuclear fuel. The Palo Verde participants have contracted for all of Palo Verdes requirements for uranium
concentrates and conversion services through 2008. The Palo Verde participants have also
contracted for all of Palo Verdes enrichment services through 2010 and fuel assembly fabrication
services until at least 2015. Spent Nuclear Fuel and Waste DisposalSee Palo Verde Nuclear Generating Station in Note 11
of Notes to Pinnacle Wests Consolidated Financial Statements in Item 8 for a discussion of spent
nuclear fuel and waste disposal. Purchased Power Agreements In addition to its own available generating capacity (see Properties in Item 2), APS
purchases electricity under various arrangements. One of the most important of these is a
long-term contract with Salt River Project. The amount of electricity available to APS is based in
large part on customer demand within certain areas now served by APS pursuant to a related
territorial agreement. The generating capacity available to APS pursuant to the contract is 350
MW. In 2004, APS received approximately 568,770 MWh of energy under the contract and paid about
$54.9 million for capacity availability and energy received. This contract may be canceled by Salt
River Project on three years notice. By letter dated June 7, 2004, Salt River Project gave notice
to APS to reduce capacity by 150 MW effective June 16, 2007. To date, this letter is the only
notice Salt River Project has given under the contract. APS may also cancel the contract on five
years notice, which may be given no earlier than December 31, 2006. In September 1990, APS entered into a thirty-year seasonal capacity exchange agreement with
PacifiCorp. Under this agreement, APS receives electricity from PacifiCorp during the summer 11




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##### Table of Contents



peak season (from May 15 to September 15) and APS returns electricity to PacifiCorp during the
winter season (from October 15 to February 15). Until 2020, APS and PacifiCorp each has 480 MW of
capacity and a related amount of energy available to it under the agreement for its respective
seasons. In 2004, APS received approximately 571,392 MWh of energy under the capacity exchange.
APS must also make additional offers of energy to PacifiCorp each year through October 31, 2020.
Pursuant to this requirement, during 2004, PacifiCorp received offers of 1,095,000 MWh and
purchased about 246,275 MWh. Consistent with the ACCs Track B Order, APS issued a request for proposals (RFP) in March
2003 and, as a result of that RFP, APS entered into contracts with three parties, including
Pinnacle West Energy, to meet a portion of APS capacity and energy requirements for the years 2003
through 2006. See Track B Order in Note 3 of Notes to Pinnacle Wests Consolidated Financial
Statements in Item 8 for additional information about the contracts and the Track B Order. Construction Program During the years 2002 through 2004, APS incurred approximately $1.4 billion in capital
expenditures. APS capital expenditures for the years 2005 through 2007 are expected to be
primarily for expanding transmission and distribution capabilities to meet growing customer needs,
for upgrading existing utility property and for environmental purposes. APS capital expenditures
were approximately $484 million in 2004. APS capital expenditures, including expenditures for
environmental control facilities, for the years 2005 through 2007 have been estimated as follows
(dollars in millions): EstimateMajor facilities:
    
    2005
    
    
    2006
    
    
    2007Delivery
    
    $
    390
    
    
    $
    395
    
    
    $
    440Generation
    
    
    352
    
    
    
    158
    
    
    
    195Other
    
    
    30
    
    
    
    7
    
    
    
    6Total
    
    $
    772
    
    
    $
    560
    
    
    $
    641
 The above amounts exclude capitalized interest costs and include capitalized property taxes
and approximately $30 million per year for nuclear fuel. The estimate for 2005 includes about $190 million for
APS planned acquisition of the Sundance Plant. See Request for Proposals and Asset Purchase
Agreement in Note 3 of Notes to Pinnacle Wests Consolidated Financial Statements in Item 8 for a
discussion of the asset purchase agreement between APS and PPL Sundance. APS conducts a continuing
review of its construction program. See Managements Discussion and Analysis of Financial Condition and Results of Operations 
Capital Needs and Resources by Company in Item 7 for additional information about APS
construction programs. 12




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Environmental Matters EPA Environmental Regulation Regional Haze RulesOn April 22, 1999, the EPA announced final regional haze rules. These
regulations require states to submit implementation plans by 2008 to eliminate all man-made
emissions causing visibility impairment in certain specified areas, including Class I Areas in the
Colorado Plateau, and to consider and potentially apply the best available retrofit technology
(BART) for major stationary sources. The rules allow nine western states and tribes to follow an alternate implementation plan and
schedule for the Class I Areas. This alternate implementation plan is known as the Annex Rule.
Five western states, including Arizona, have submitted proposed State Implementation Plans
to the EPA to implement the Annex Rule. On February 18, 2005, the U.S. Court of Appeals for the District of Columbia granted a
petition for review of the Annex Rule, filed by the Center for Energy and Economic Development
(CEED). Center for Energy and Economic Development v. the EPA, No. 03-1222 (D.C. Cir.). APS, Phelps
Dodge Corporation, and Environmental Defense were intervenors in the
litigation in support of the EPA and the Annex
Rule. Although the Court concluded that the EPA has the authority to promulgate a BART alternative,
the Court ruled that the EPA must first conduct a BART analysis of eligible sources to demonstrate that
the alternate plan would achieve greater reductions than BART. At this time, the EPAs response to the
CEEDdecision is uncertain. The Company cannot currently predict the outcome of this matter. Mercury  On March 15, 2005, the EPA issued the
Clean Air Mercury Rule to regulate mercury emissions from coal-fired power plants.  This rule establishes
performance standards limiting mercury emissions from coal-fired power plants and establishes a two phased market-based trading program.  Under the trading program, the EPA has assigned each state a "budget" for reducing coal-fired power plant mercury emissions, and each state must submit to the EPA a plan detailing how it will meet its "budget."  In the first phase of the program, beginning in 2010, mercury emissions will be reduced from a total of 48 tons per year to 38 tons.  In 2018, mercury emissions will be further reduced to 15 tons.  APS is currently evaluating the potential impact of this rule. Federal Implementation PlanIn September 1999, the EPA proposed a FIP to set air quality
standards at certain power plants, including the Navajo Generating Station and Four Corners. The
FIP is similar to current Arizona regulation of the Navajo Generating Station and New Mexico
regulation of Four Corners, with minor modifications. APS does not currently expect the FIP to
have a material adverse effect on its financial position, results of operations or liquidity. SuperfundSuperfund establishes liability for the cleanup of hazardous substances found
contaminating the soil, water or air. Those who generated, transported or disposed of hazardous
substances at a contaminated site are among those who are PRPs. PRPs may be strictly, and often
jointly and severally, liable for clean-up. On September 3, 2003, the EPA advised APS that the EPA 13




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considers APS to be a PRP in the Motorola 52nd Street Superfund Site, Operable Unit 3
(OU3) in Phoenix, Arizona. APS has facilities that are within this superfund site. APS and
Pinnacle West have agreed with the EPA to perform certain investigative activities of the APS
facilities within OU3. Because the investigation has not yet been completed and ultimate
remediation requirements are not yet finalized, neither APS nor Pinnacle West can currently
estimate the expenditures which may be required. Manufactured Gas Plant SitesAPS is currently investigating properties, which it now owns or
which were previously owned by it or its corporate predecessors, that were at one time sites of, or
sites associated with, manufactured gas plants. APS is taking action to voluntarily remediate these sites. APS does
not expect these matters to have a material adverse effect on its financial position, results of
operations or liquidity. Navajo Nation Environmental Issues Four Corners and the Navajo Generating Station are located on the Navajo Reservation and are
held under easements granted by the federal government as well as leases from the Navajo Nation.
APS is the Four Corners operating agent. APS owns all of Four Corners Units 1, 2 and 3, and a 15%
interest in Four Corners Units 4 and 5. APS owns a 14% interest in Navajo Generating Station Units
1, 2 and 3. In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution Prevention and Control
Act, the Navajo Nation Safe Drinking Water Act and the Navajo Nation Pesticide Act (collectively,
the Navajo Acts). The Navajo Acts purport to give the Navajo Nation Environmental Protection
Agency authority to promulgate regulations covering air quality, drinking water and pesticide
activities, including those activities that occur at Four Corners and the Navajo Generating
Station. On October 17, 1995, the Four Corners participants and the Navajo Generating Station
participants each filed a lawsuit in the District Court of the Navajo Nation, Window Rock District,
challenging the applicability of the Navajo Nation as to Four Corners and Navajo Generating
Station. The Court has stayed these proceedings pursuant to a request by the parties, and the
parties are seeking to negotiate a settlement. APS cannot currently predict the outcome of this
matter. In February 1998, the EPA issued regulations identifying those Clean Air Act provisions for
which it is appropriate to treat Indian tribes in the same manner as states. The EPA has announced
that it has not yet determined whether the Clean Air Act would supersede pre-existing binding
agreements between the Navajo Nation and the Four Corners participants and the Navajo Generating
Station participants that limit the Navajo Nations environmental regulatory authority over the
Navajo Generating Station and Four Corners. APS believes that the Clean Air Act does not supersede
these pre-existing agreements. The parties have reached tentative agreement on a resolution of the
Clean Air Act issues. If such an agreement is executed by the parties and approved by the EPA, APS
would dismiss the pending litigation to the extent the claims relate to the Clean Air Act. APS
cannot currently predict the outcome of this matter. In April 2000, the Navajo Tribal Council approved operating permit regulations under the
Navajo Nation Air Pollution Prevention and Control Act. APS believes the regulations fail to
recognize that the Navajo Nation did not intend to assert jurisdiction over Four Corners and the
Navajo Generating Station. On July 12, 2000, the Four Corners participants and the Navajo
Generating Station participants each filed a petition with the Navajo Supreme Court for review of
the 14




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##### Table of Contents



operating permit regulations. Those proceedings have been stayed, pending the settlement
negotiations mentioned above. APS cannot currently predict the outcome of this matter. Water Supply Assured supplies of water are important for APS and Pinnacle West Energys generating plants.
At the present time, APS and Pinnacle West Energy have adequate water to meet their needs.
However, conflicting claims to limited amounts of water in the southwestern United States have
resulted in numerous court actions. Both groundwater and surface water in areas important to APS operations have been the subject
of inquiries, claims and legal proceedings, which will require a number of years to resolve. APS
is one of a number of parties in a proceeding before a state court in New Mexico to adjudicate
rights to a stream system from which water for Four Corners is derived. (State of New Mexico,
in the relation of S.E. Reynolds, State Engineer vs. United States of America, City of Farmington,
Utah International, Inc., et al., San Juan County, New Mexico, District Court No. 75-184). An
agreement reached with the Navajo Nation in 1985, however, provides that if Four Corners loses a
portion of its rights in the adjudication, the Navajo Nation will provide, for a then-agreed upon
cost, sufficient water from its allocation to offset the loss. A summons served on APS in early 1986 required all water claimants in the Lower Gila River
Watershed in Arizona to assert any claims to water on or before January 20, 1987, in an action
pending in Maricopa County, Arizona, Superior Court. (In re The General Adjudication of All
Rights to Use Water in the Gila River System and Source, Supreme Court Nos. WC-79-0001 through
WC 79-0004 (Consolidated) [WC-1, WC-2, WC-3 and WC-4 (Consolidated)], Maricopa County Nos. W-1,
W-2, W-3 and W-4 (Consolidated)). Palo Verde is located within the geographic area subject to the
summons. APS rights and the rights of the Palo Verde participants to the use of groundwater and
effluent at Palo Verde are potentially at issue in this action. As project manager of Palo Verde,
APS filed claims that dispute the courts jurisdiction over the Palo Verde participants
groundwater rights and their contractual rights to effluent relating to Palo Verde. Alternatively,
APS seeks confirmation of such rights. Three of APS other power plants and two of Pinnacle West
Energys power plants are also located within the geographic area subject to the summons. APS
claims dispute the courts jurisdiction over its groundwater rights with respect to these plants.
Alternatively, APS seeks confirmation of such rights. In November 1999, the Arizona Supreme Court
issued a decision confirming that certain groundwater rights may be available to the federal
government and Indian tribes. In addition, in September 2000, the Arizona Supreme Court issued a
decision affirming the lower courts criteria for resolving groundwater claims. Litigation on both
of these issues will continue in the trial court. No trial date concerning APS water rights
claims has been set in this matter. APS has also filed claims to water in the Little Colorado River Watershed in Arizona in an
action pending in the Apache County, Arizona, Superior Court. (In re The General Adjudication
of All Rights to Use Water in the Little Colorado River System and Source, Supreme Court No.
WC-79-0006 WC-6, Apache County No. 6417). APS groundwater resource utilized at Cholla is within
the geographic area subject to the adjudication and is therefore potentially at issue in the case.
APS claims dispute the courts jurisdiction over its groundwater rights. Alternatively, APS seeks
confirmation of such rights. A number of parties are in the process of settlement negotiations
with respect to certain claims in this matter. Other claims have been identified as ready for
litigation in 15




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##### Table of Contents



motions filed with the court. No trial date concerning APS water rights claims has
been set in this matter. Although the above matters remain subject to further evaluation, Pinnacle West expects that
the described litigation will not have a material adverse impact on its financial position, results
of operations or liquidity. The Four Corners region, in which Four Corners is located, has been experiencing drought
conditions that may affect the water supply for the plants if adequate moisture is not received in
the watershed that supplies the area. APS is continuing to work with area stakeholders to
implement agreements to minimize the effect, if any, on operations of the plant for 2005 and later
years. The effect of the drought cannot be fully assessed at this time, and APS cannot predict the
ultimate outcome, if any, of the drought or whether the drought will adversely affect the amount of
power available, or the price thereof, from Four Corners. BUSINESS OF PINNACLE WEST ENERGY CORPORATION Pinnacle West Energy was incorporated in 1999 under the laws of the State of Arizona and is
engaged principally in the operation of unregulated generating plants. Pinnacle West Energy had
approximately 100 employees as of December 31, 2004. Pinnacle West Energys principal offices are
located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone 602-250-4145). See Liquidity and Capital Resources in Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 for a discussion of Pinnacle West Energys capital
requirements. Pinnacle West Energy owns the PWEC Dedicated Assets as well as an interest in Silverhawk. The PWEC Dedicated Assets were built as a result of what APS believed was a regulatory
restriction against APS construction of additional plants and based on the requirement in the 1999
Settlement Agreement that APS transfer its generation assets. As discussed under APS General Rate
Case; 2004 Settlement Agreement in Note 3 of Notes to Pinnacle Wests Consolidated Financial
Statements in Item 8, as part of the proposed settlement of APS general rate case, APS would
acquire the PWEC Dedicated Assets from Pinnacle West Energy. Silverhawk, which is Pinnacle West
Energys only power plant not included in the PWEC Dedicated Assets, is a 570 MW combined cycle
power plant located 20 miles north of Las Vegas, Nevada in which Pinnacle West Energy has a 75%
ownership interest. See Properties in Item 2 for a summary of the generating plants owned by
Pinnacle West Energy. At December 31, 2004, Pinnacle West Energy had total assets of $1.3 billion, of which $1.0
billion related to the PWEC Dedicated Assets. Pinnacle West Energy had a pretax loss of $47
million in 2004, a net loss of $1 million in 2003 and a net loss of $19 million in 2002. Income
taxes related to Pinnacle West Energy were recorded by Pinnacle West in 2004. BUSINESS OF APS ENERGY SERVICES COMPANY, INC. APS Energy Services was incorporated in 1998 under the laws of the State of Arizona and
provides competitive commodity-related energy services (such as direct access commodity contracts,
energy procurement and energy supply consultation) and energy-related products and services (such
as energy master planning, energy use consultation and facility audits, cogeneration analysis and
installation and project management) to commercial, industrial and institutional retail customers
in 16




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##### Table of Contents



the western United States. APS Energy Services had approximately 100 employees as of December
31, 2004. APS Energy Services principal offices are located at 400 East Van Buren Street,
Phoenix, Arizona 85004 (telephone 602-250-5000). APS Energy Services had net income of $3 million in 2004, net income of $16 million in 2003,
and pretax income of $28 million in 2002. Income taxes related to APS Energy Services were
recorded by Pinnacle West prior to 2003. At December 31, 2004, APS Energy Services had total
assets of $77 million. BUSINESS OF SUNCOR DEVELOPMENT COMPANY SunCor was incorporated in 1965 under the laws of the State of Arizona and is a developer of
residential, commercial and industrial real estate projects in Arizona, Idaho, New Mexico and Utah.
The principal executive offices of SunCor are located at 80 East Rio Salado Parkway, Suite 410,
Tempe, Arizona 85281 (telephone 480-317-6800). SunCor and its subsidiaries had approximately 800
employees at December 31, 2004. At December 31, 2004, SunCor had total assets of about $464 million. SunCors assets consist
primarily of land with improvements, commercial buildings, golf courses and other real estate
investments. SunCor intends to continue its focus on real estate development of master-planned
communities, mixed-use residential, commercial, office and industrial projects. SunCor projects under development include seven master-planned communities and several
commercial projects. The commercial projects and four of the master-planned communities are in
Arizona. Other master-planned communities are located near St. George, Utah, Boise, Idaho and
Santa Fe, New Mexico. SunCor has implemented an accelerated asset sales program for 2003 through 2005. As a result
of this program, SunCor expects to have net income of approximately $50 million in 2005. SunCor
also expects to make a cash distribution of approximately $80 million to $100 million to the parent
in 2005. For the past three years, SunCors operating revenues were approximately: $360 million in
2004; $362 million in 2003; and $201 million in 2002. SunCors net income was approximately $45
million in 2004; $56 million in 2003; and $19 million in 2002. Certain components of SunCors real
estate sales activities, which are included in the real estate segment, are required to be reported
as discontinued operations on Pinnacle Wests Consolidated Statements of Income in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. See Note 22 of
Notes to Pinnacle Wests Consolidated Financial Statements in Item 8. See Note 6 of Notes to Pinnacle Wests Consolidated Financial Statements in Item 8 for
information regarding SunCors long-term debt and Liquidity and Capital Resources in
Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7
for a discussion of SunCors capital requirements. BUSINESS OF EL DORADO INVESTMENT COMPANY El Dorado was incorporated in 1983 under the laws of the State of Arizona. El Dorado owns
minority interests in several energy-related investments and Arizona community-based ventures. El 17




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Dorados short-term goal is to prudently realize the value of its existing investments. On a
long-term basis, Pinnacle West may use El Dorado, when appropriate, for investments that are
strategic to the business of generating, distributing and marketing electricity. El Dorados
offices are located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone 602-250-3517). El Dorado had pretax income of $40 million in 2004, pretax income of $7 million in 2003, and a
pretax loss of $55 million in 2002. Pinnacle West records income taxes related to El Dorado. El
Dorado sold its investment in NAC on November 18, 2004, which resulted in a pre-tax gain of $4
million and is classified as discontinued operations in 2004. All
related revenue and expenses for NAC have been reclassified to
discontinued operations for the years ended December 31, 2003
and 2002 (see Note 22 of Notes to Pinnacle Wests
Consolidated Financial Statements in Item 8). In addition, the year ended 2004
includes a $35 million gain ($21 million after tax) related to the sale of El Dorados limited
partnership interest in the Phoenix Suns. See Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 for additional information. At December 31, 2004,
El Dorado had total assets of $23 million. 18




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##### Table of Contents



ITEM 2. PROPERTIES Capacity APS and Pinnacle West Energys generating facilities are described below. For APS plants,
the net accredited capacities are reported, consistent with industry practice for regulated
utilities. For Pinnacle West Energy, the permitted capacities are reported, consistent with
industry practice for unregulated plants. APS  Net Accredited Capacity APS present generating facilities have net accredited capacities as follows: Capacity (kW)Coal:Units 1, 2 and 3 at Four Corners
    
    
    560,00015% owned Units 4 and 5 at Four Corners
    
    
    222,000Units 1, 2 and 3 at Cholla
    
    
    615,00014% owned Units 1, 2 and 3 at the Navajo Generating Station
    
    
    315,000Subtotal
    
    
    1,712,000Gas or Oil:Two steam units at Ocotillo and two steam units at Saguaro
    
    
    430,000Eleven combustion turbine units
    
    
    493,000Three combined cycle units
    
    
    255,000Subtotal
    
    
    1,178,000Nuclear:29.1% owned or leased Units 1, 2, and 3 at Palo Verde
    
    
    1,107,000Hydro and Solar
    
    
    9,510Total APS facilities
    
    
    4,006,510Pinnacle West Energy  Permitted CapacitiesPinnacle West Energys present generating facilities have permitted
capacities as follows:Gas or Oil:Two combined cycle units at Redhawk, two combined cycle units
at West Phoenix and 75% ownership of one combined cycle unit at
Silverhawk
    
    
    2,138,000One combustion turbine unit at Saguaro
    
    
    80,000Total Pinnacle West Energy facilities
    
    
    2,218,000
 19




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##### Table of Contents



Reserve Margin APS 2004 peak one-hour demand on its electric system was recorded on August 11, 2004 at
6,402,100 kW, compared to the 2003 peak of 6,332,400 kW recorded on July 14, 2003. Taking into
account additional capacity then available to APS under long-term purchase power contracts as well
as APS and Pinnacle West Energys generating capacity, APS capability of meeting system demand on
August 11, 2004, amounted to 6,388,600 kW, for an installed reserve margin of negative 0.3%. The
power actually available to APS from its resources fluctuates from time to time due in part to
planned and unplanned plant and transmission outages and technical
problems. The available capacity from sources actually
operable at the time of the 2004 peak amounted to 3,570,600 kW, for a margin of negative 52.6%.
Firm purchases totaling 4,187,000 kW, including short-term seasonal purchases and unit contingent
purchases, were in place at the time of the peak, ensuring the ability to meet the load requirement
with an actual reserve margin of 6.9 %. See Business of Arizona Public Service Company  Purchased Power and Generating Fuel 
Purchased Power Agreements in Item 1 for information about certain of APS long-term power
agreements. Plant Sites Leased from Navajo Nation The Navajo Generating Station and Four Corners are located on land held under easements from
the federal government and also under leases from the Navajo Nation. These are long-term
agreements with options to extend, and APS does not believe that the risks with respect to
enforcement of these easements and leases are material. The majority of coal contracted for use in
these plants and certain associated transmission lines are also located on Indian reservations.
See Business of Arizona Public Service Company  Purchased Power and Generating Fuel  Coal
Supply in Item 1. Palo Verde Nuclear Generating Station Regulatory Operation of each of the three Palo Verde units requires an operating license from the NRC.
The NRC issued full power operating licenses for Unit 1 in June 1985, Unit 2 in April 1986 and Unit
3 in November 1987. The full power operating licenses, each valid for a period of approximately 40
years, authorize APS, as operating agent for Palo Verde, to operate the three Palo Verde units at
full power. Nuclear Decommissioning Costs The NRC rules on financial assurance requirements for the decommissioning of nuclear power
plants provide that a licensee may use a trust as the exclusive financial assurance mechanism if
the licensee recovers estimated total decommissioning costs through cost-of-service rates or
through a non-bypassable charge. The non-bypassable systems benefits charge is the charge that
the ACC has approved for APS recovery of certain types of costs, including costs for low income
programs, demand side management, consumer education, environmental, renewables, etc.
Non-bypassable means that if a customer chooses to take energy from an energy service provider
other than APS, the customer will still have to pay this charge as part of the customers APS
electric bill. 20




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##### Table of Contents



Other mechanisms are prescribed, including prepayment, if the requirements for exclusive
reliance on an external sinking fund mechanism are not met. APS
currently relies on an external
sinking fund mechanism to meet the NRC financial assurance requirements for its interests in Palo
Verde Units 1, 2 and 3. The decommissioning costs of Palo Verde Units 1, 2 and 3 are currently
included in APS ACC jurisdictional rates. The Rules provide that decommissioning costs are
recoverable through a non-bypassable system benefits charge, which would allow APS to maintain
its external sinking fund mechanism. See Note 12 of Notes to Pinnacle Wests Consolidated
Financial Statements in Item 8 for additional information about APS nuclear decommissioning costs. Palo Verde Liability and Insurance Matters See Palo Verde Nuclear Generating Station in Note 11 of Notes to Pinnacle Wests
Consolidated Financial Statements in Item 8 for a discussion of the insurance maintained by the
Palo Verde participants, including APS, for Palo Verde. Property Not Held in Fee or Subject to Encumbrances Jointly-Owned Facilities APS shares ownership of some of its generating and transmission facilities with other
companies. Pinnacle West Energy shares ownership of its Silverhawk plant. The following table
shows APS and Pinnacle West Energys interests in those jointly-owned facilities recorded on the
Consolidated Balance Sheets at December 31, 2004: Percent OwnedAPS:Generating 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)
    
    
    62.4
    %(b)Transmission facilities:ANPP500KV 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)Palo Verde  Southeast Valley Project
    
    
    15.0
    %(b)Harquahala
    
    
    80.0
    %(b)Pinnacle West Energy:Generating facilities:Silverhawk
    
    
    75.0
    %
  (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. 21




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##### Table of Contents



Palo Verde Leases In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common facilities in
three separate sale leaseback transactions. APS accounts for these leases as operating leases.
The leases, which have terms of 29.5 years, contain options to renew the leases for two additional
years and to purchase the property for fair market value at the end of the lease terms. See Notes
9 and 20 of Notes to Pinnacle Wests Consolidated Financial Statements in Item 8 for additional
information regarding the Palo Verde Unit 2 sale leaseback transactions. Transmission Access APS
transmission facilities consist of approximately 5,589 pole miles of overhead lines and
approximately 37 miles of underground lines, 5,457 miles of which are located within the State of
Arizona. APS distribution
facilities consist of approximately 12,211 pole miles of overhead lines and approximately 13,727
miles of underground lines, all of which are located within the State of Arizona. Other Information Regarding Our Properties See Business of Arizona Public Service Company  Environmental Matters and Water Supply in
Item 1 with respect to matters having a possible impact on the operation of certain of APS and
Pinnacle West Energys power plants. See Business of Arizona Public Service Company  Construction Program in Item 1 and
Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity
and Capital Resources in Item 7 for a discussion of APS and Pinnacle West Energys construction
programs. Information Regarding SunCors Properties See Business of SunCor Development Company in Item 1 for information regarding SunCors
properties. Substantially all of SunCors debt is collateralized by interests in certain real
property. 22




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(MAP) 23




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ITEM 3. LEGAL PROCEEDINGS See Business of Arizona Public Service Company  Environmental Matters and  Water Supply
in Item 1 with regard to pending or threatened litigation and other disputes. See Note 3 of Notes
to Pinnacle Wests Consolidated Financial Statements in Item 8 for a discussion of the Rules, the
Track A Order and related litigation. See
Note 11 of Notes to the Pinnacle West Consolidated Financial
Statements in Item 8 with regard to a lawsuit against APS and
the other Navajo Generating Station participants and for
information relating to the FERC proceedings on California energy market issues. 
 ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS Not applicable. 24




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##### Table of Contents



SUPPLEMENTAL ITEM.
EXECUTIVE OFFICERS OF PINNACLE WEST Pinnacle Wests executive officers are as follows: Name
    
    Age at March 1, 2005
    
    Position(s) at March 1, 2005William J. Post
    
    
    54
    
    
    Chairman of the Board and Chief
Executive Officer (1)Jack E. Davis
    
    
    58
    
    
    President and Chief Operating
Officer, and President and
Chief Executive Officer, APS
(1)Donald E. Brandt
    
    
    50
    
    
    Executive Vice President and
Chief Financial OfficerArmando B. Flores
    
    
    61
    
    
    Executive Vice President,
Corporate Business Services,
APSChris N. Froggatt
    
    
    47
    
    
    Vice President and Controller,
APSBarbara M. Gomez
    
    
    50
    
    
    Vice President and TreasurerJames M. Levine
    
    
    55
    
    
    Executive Vice President,
Generation, APS and President,
Pinnacle West EnergyNancy C. Loftin
    
    
    51
    
    
    Vice President, General Counsel
and SecretaryDonald G. Robinson
    
    
    51
    
    
    Vice President, Planning, APSSteven M. Wheeler
    
    
    56
    
    
    Executive Vice President,
Customer Service and
Regulation, APS
   (1)
    
    Member of the Board of Directors. The executive officers of Pinnacle West are elected no less often than annually and may be
removed by the Board of Directors at any time. The terms served by the named officers in their
current positions and the principal occupations (in addition to those stated in the table) of such
officers for the past five years have been as follows: 25




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Mr. Post was elected Chairman of the Board effective February 2001, and Chief Executive
Officer effective February 1999. He has served as an officer of Pinnacle West since 1995 in the
following capacities: from August 1999 to February 2001 as President; from February 1997 to
February 1999 as President; and from June 1995 to February 1997 as Executive Vice President. Mr.
Post is also Chairman of the Board (since February 2001) of APS. He was President of APS from
February 1997 until October 1998 and he was Chief Executive Officer from February 1997 until
October 2002. Mr. Post is also a director of APS, Pinnacle West Energy and Phelps Dodge
Corporation. Mr. Davis was elected President effective February 2001 and Chief Operating Officer effective
September 2003. Prior to that time he was Chief Operating Officer and Executive Vice President of
Pinnacle West (April 2000  February 2001) and Executive Vice President, Commercial Operations of
APS (September 1996  October 1998). Mr. Davis is also President of APS (since October 1998) and
Chief Executive Officer of APS (since October 2002). He is a director of APS and Pinnacle West
Energy. Mr. Brandt was elected to his present position in September 2003 and was Senior Vice President
and Chief Financial Officer (December 2002  September 2003). Prior to that time, he was Senior
Vice President and Chief Financial Officer of Ameren Corporation (diversified energy services
company). Mr. Brandt was elected Executive Vice President and Chief Financial Officer of APS in
September 2003. He was also Senior Vice President and Chief Financial Officer of APS (January 2003
 September 2003). Mr. Flores was elected to his present position in September 2003. Prior to that time, he was
Executive Vice President, Corporate Business Services of Pinnacle West (July 1999  September
2003). He was also Executive Vice President, Corporate Business Services of APS (October 1998 
July 1999). Mr. Froggatt was elected to his present position in October 2002. Prior to that time, he was
Vice President and Controller of Pinnacle West (August 1999  October 2002), Controller of Pinnacle
West (July 1999  August 1999) and Controller of APS (July 1997  July 1999). Ms. Gomez was elected to her present position in February 2004. Prior to that time, she was
Treasurer (August 1999  February 2004) and Manager, Treasury Operations of APS (1997  1999). She
was also elected Treasurer of APS in October 1999 and Vice President of APS in February 2004. Mr. Levine was elected Executive Vice President of APS in July 1999 and President and Chief
Executive Officer of Pinnacle West Energy in January 2003. Prior to that time, he was Senior Vice
President, Nuclear Generation of APS (September 1996  July 1999). Ms. Loftin was elected Vice President and General Counsel in July 1999 and Secretary in
October 2002. She was also elected Vice President and General Counsel of APS in July 1999 and
Secretary of APS in October 2002. Mr. Robinson was elected to his present position in September 2003. Prior to that time, he
was Vice President, Finance and Planning of APS (October 2002  September 2003), Vice President,
Regulation and Planning of Pinnacle West (June 2001  October 2002) and Director, Accounting,
Regulation and Planning of Pinnacle West (prior to June 2001). Mr. Wheeler was elected to his present position in September 2003. Prior to that time, he was
Senior Vice President, Regulation, System Planning and Operations of APS (October 2002  September
2003) and Senior Vice President, Transmission, Regulation and Planning of Pinnacle West and APS
(June 2001  October 2002). Prior to that time he was a partner with Snell & Wilmer L.L.P. 26




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Pinnacle Wests common stock is publicly held and is traded on the New York and Pacific Stock
Exchanges. At the close of business on March 14, 2005, Pinnacle Wests common stock was held of
record by approximately 34,248 shareholders. QUARTERLY STOCK PRICES AND DIVIDENDS PAID PER SHARE
STOCK SYMBOL: PNW DividendsPer2004
    
    High
    
    
    Low
    
    
    Close
    
    
    Share1st Quarter
    
    $
    40.81
    
    
    $
    36.90
    
    
    $
    39.35
    
    
    $
    0.4502nd Quarter
    
    
    41.50
    
    
    
    36.30
    
    
    
    40.39
    
    
    
    0.4503rd Quarter
    
    
    42.99
    
    
    
    39.63
    
    
    
    41.50
    
    
    
    0.4504th Quarter
    
    
    45.84
    
    
    
    41.61
    
    
    
    44.41
    
    
    
    0.475
 DividendsPer2003
    
    High
    
    
    Low
    
    
    Close
    
    
    Share1st Quarter
    
    $
    37.13
    
    
    $
    28.34
    
    
    $
    33.24
    
    
    $
    0.4252nd Quarter
    
    
    39.59
    
    
    
    31.35
    
    
    
    37.45
    
    
    
    0.4253rd Quarter
    
    
    38.03
    
    
    
    32.87
    
    
    
    35.50
    
    
    
    0.4254th Quarter
    
    
    40.48
    
    
    
    34.91
    
    
    
    40.02
    
    
    
    0.450
 APS common stock is wholly-owned by Pinnacle West and is not listed for trading on any stock
exchange. As a result, there is no established public trading market for APS common stock. The chart below sets forth the dividends declared on APS common stock for each of the four
quarters for 2004 and 2003. Common Stock Dividends
(Dollars in Thousands) Quarter
    
    2004
    
    
    20031st Quarter
    
    $
    42,500
    
    
    $
    42,5002nd Quarter
    
    
    42,500
    
    
    
    42,5003rd Quarter
    
    
    42,500
    
    
    
    42,5004th Quarter
    
    
    42,500
    
    
    
    42,500
 The sole holder of APS common stock, Pinnacle West, is entitled to dividends when and as
declared out of funds legally available therefor. As of December 31, 2004, APS did not have any
outstanding preferred stock. Pinnacle West did not purchase any of its common stock during the fourth quarter of
2004. 27




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA PINNACLE WEST CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands,
except per share amounts)OPERATING RESULTSOperating revenues:Regulated electricity segment
    
    $
    2,035,247
    
    
    $
    1,978,075
    
    
    $
    1,890,391
    
    
    $
    1,984,305
    
    
    $
    2,538,752Marketing and trading segment
    
    
    461,870
    
    
    
    391,886
    
    
    
    286,879
    
    
    
    469,784
    
    
    
    418,532Real estate segment
    
    
    359,792
    
    
    
    361,604
    
    
    
    201,081
    
    
    
    168,908
    
    
    
    158,365Other revenues (a)
    
    
    42,816
    
    
    
    27,929
    
    
    
    26,899
    
    
    
    11,771
    
    
    
    3,873Total operating revenues
    
    $
    2,899,725
    
    
    $
    2,759,494
    
    
    $
    2,405,250
    
    
    $
    2,634,768
    
    
    $
    3,119,522Income from continuing operations
    
    
    235,218
    
    
    
    225,803
    
    
    
    236,563
    
    
    
    327,367
    
    
    
    302,332Discontinued operations  net of income
taxes (b)
    
    
    7,977
    
    
    
    14,776
    
    
    
    (21,410
    )
    
    
    
    
    
    
    Cumulative effect of change in accounting
 net of income taxes (c) (d)
    
    
    
    
    
    
    
    
    
    
    (65,745
    )
    
    
    (15,201
    )
    
    
    Net income
    
    $
    243,195
    
    
    $
    240,579
    
    
    $
    149,408
    
    
    $
    312,166
    
    
    $
    302,332COMMON STOCK DATABook value per share  year-end
    
    $
    32.14
    
    
    $
    30.97
    
    
    $
    29.40
    
    
    $
    29.46
    
    
    $
    28.09Earnings (loss) per weighted average
common share outstanding:Continuing operations  basic
    
    $
    2.57
    
    
    $
    2.47
    
    
    $
    2.79
    
    
    $
    3.86
    
    
    $
    3.57Discontinued operations (b)
    
    
    0.09
    
    
    
    0.17
    
    
    
    (0.26
    )
    
    
    
    
    
    
    Cumulative effect of change
in accounting (c) (d)
    
    
    
    
    
    
    
    
    
    
    (0.77
    )
    
    
    (0.18
    )
    
    
    Net income  basic
    
    $
    2.66
    
    
    $
    2.64
    
    
    $
    1.76
    
    
    $
    3.68
    
    
    $
    3.57Continuing operations  diluted
    
    $
    2.57
    
    
    $
    2.47
    
    
    $
    2.78
    
    
    $
    3.85
    
    
    $
    3.56Net income  diluted
    
    $
    2.66
    
    
    $
    2.63
    
    
    $
    1.76
    
    
    $
    3.68
    
    
    $
    3.56Dividends declared per share
    
    $
    1.825
    
    
    $
    1.725
    
    
    $
    1.625
    
    
    $
    1.525
    
    
    $
    1.425Indicated annual dividend rate
per share  year-end
    
    $
    1.90
    
    
    $
    1.80
    
    
    $
    1.70
    
    
    $
    1.60
    
    
    $
    1.50Weighted-average common shares
outstanding  basic
    
    
    91,396,904
    
    
    
    91,264,696
    
    
    
    84,902,946
    
    
    
    84,717,649
    
    
    
    84,732,544Weighted-average common shares
outstanding  diluted
    
    
    91,532,473
    
    
    
    91,405,134
    
    
    
    84,963,921
    
    
    
    84,930,140
    
    
    
    84,935,282BALANCE SHEET DATATotal assets
    
    $
    9,896,747
    
    
    $
    9,519,042
    
    
    $
    9,139,157
    
    
    $
    8,529,124
    
    
    $
    7,697,558Liabilities and equity:Long-term debt less current maturities
    
    $
    2,584,985
    
    
    $
    2,616,585
    
    
    $
    2,743,741
    
    
    $
    2,673,078
    
    
    $
    1,955,083Other liabilities
    
    
    4,361,566
    
    
    
    4,072,678
    
    
    
    3,709,263
    
    
    
    3,356,723
    
    
    
    3,359,761Total liabilities
    
    
    6,946,551
    
    
    
    6,689,263
    
    
    
    6,453,004
    
    
    
    6,029,801
    
    
    
    5,314,844Common stock equity
    
    
    2,950,196
    
    
    
    2,829,779
    
    
    
    2,686,153
    
    
    
    2,499,323
    
    
    
    2,382,714Total liabilities and equity
    
    $
    9,896,747
    
    
    $
    9,519,042
    
    
    $
    9,139,157
    
    
    $
    8,529,124
    
    
    $
    7,697,558
   (a)
    
    Includes reclassifications of revenues in 2003 and 2002 related to the discontinued
operations of NAC. See Note 22 of Notes to Pinnacle Wests Consolidated Financial Statements
in Item 8.(b)
    
    NAC and real estate discontinued operations. See Note 22 of Notes to Pinnacle Wests
Consolidated Financial Statements in Item 8.(c)
    
    Change in accounting standards related to energy trading activities in 2002. See Note 18 of
Notes to Pinnacle Wests Consolidated Financial Statements in Item 8.(d)
    
    Change in accounting standards related to derivatives in 2001.   28




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SELECTED FINANCIAL DATA
ARIZONA PUBLIC SERVICE COMPANY 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands)OPERATING RESULTSElectric operating revenues:Regulated electricity
    
    $
    2,051,602
    
    
    $
    1,999,390
    
    
    $
    1,902,112
    
    
    $
    1,984,305
    
    
    $
    2,538,750Marketing and trading
    
    
    145,519
    
    
    
    105,541
    
    
    
    34,054
    
    
    
    367,793
    
    
    
    395,392Total electric operating revenues
    
    $
    2,197,121
    
    
    $
    2,104,931
    
    
    $
    1,936,166
    
    
    $
    2,352,098
    
    
    $
    2,934,142Purchased power and fuel costs:Regulated electricity
    
    
    612,300
    
    
    
    606,251
    
    
    
    438,141
    
    
    
    649,405
    
    
    
    1,065,596Marketing and trading
    
    
    150,954
    
    
    
    97,180
    
    
    
    32,662
    
    
    
    132,544
    
    
    
    267,032Operating expenses
    
    
    1,104,886
    
    
    
    1,103,342
    
    
    
    1,136,363
    
    
    
    1,171,171
    
    
    
    1,155,278Operating income
    
    
    328,981
    
    
    
    298,158
    
    
    
    329,000
    
    
    
    398,978
    
    
    
    446,236Other income/(deductions)
    
    
    15,328
    
    
    
    26,347
    
    
    
    (8,041
    )
    
    
    (79
    )
    
    
    (6,545
    )Interest deductions  net
    
    
    144,682
    
    
    
    143,568
    
    
    
    121,616
    
    
    
    118,211
    
    
    
    133,097Income before cumulative effect
adjustment
    
    
    199,627
    
    
    
    180,937
    
    
    
    199,343
    
    
    
    280,688
    
    
    
    306,594Cumulative effect of change in
accounting  net of income
taxes (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,201
    )
    
    
    Net income
    
    $
    199,627
    
    
    $
    180,937
    
    
    $
    199,343
    
    
    $
    265,487
    
    
    $
    306,594BALANCE SHEET DATATotal assets
    
    $
    8,098,552
    
    
    $
    7,722,533
    
    
    $
    7,122,238
    
    
    $
    6,815,458
    
    
    $
    6,924,500Capital structure:Common stock equity
    
    $
    2,232,402
    
    
    $
    2,203,630
    
    
    $
    2,159,312
    
    
    $
    2,150,690
    
    
    $
    2,119,768Long-term debt less current
maturities
    
    
    2,267,094
    
    
    
    2,135,606
    
    
    
    2,217,340
    
    
    
    1,949,074
    
    
    
    1,806,908Total capitalization
    
    
    4,499,496
    
    
    
    4,339,236
    
    
    
    4,376,652
    
    
    
    4,099,764
    
    
    
    3,926,676Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,162
    
    
    
    82,100Current maturities of long-term
debt
    
    
    451,247
    
    
    
    487,067
    
    
    
    3,503
    
    
    
    125,451
    
    
    
    250,266Total
    
    $
    4,950,743
    
    
    $
    4,826,303
    
    
    $
    4,380,155
    
    
    $
    4,396,377
    
    
    $
    4,259,042
  (a)
    Change in accounting standards related to derivatives. 29




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion should be read in conjunction with Pinnacle Wests Consolidated
Financial Statements and Arizona Public Service Companys Financial Statements and the related
Notes that appear in Item 8 of this report. OVERVIEW Pinnacle West owns all of the outstanding common stock of APS. APS is a vertically-integrated
electric utility that provides either retail or wholesale electric service to most of the state of
Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson
metropolitan area and Mohave County in northwestern Arizona. Through its marketing and trading
division, APS also generates, sells and delivers electricity to wholesale customers in the western
United States. APS has historically accounted for a substantial part of our revenues and earnings.
Customer growth in APS service territory is about three times the national average and remains a
fundamental driver of our revenues and earnings. Pinnacle West Energy is our unregulated generation subsidiary. We formed Pinnacle West Energy
in 1999 as a result of the ACCs requirement that APS transfer all of its competitive assets and
services to an affiliate or to a third party by the end of 2002. We planned to transfer APS
generation assets to Pinnacle West Energy. Additionally, Pinnacle West Energy constructed several
power plants to meet growing energy needs (1790 MW in Arizona and 570 MW in Nevada). In September
2002, the ACC issued the Track A Order, which prohibited APS from transferring its generation
assets to Pinnacle West Energy. As a result of the Track A Order, APS, through its general rate
case currently pending before the ACC, is seeking to transfer the plants built by Pinnacle West
Energy in Arizona to APS to unite the Arizona generation under one common owner, as originally
intended. We refer to these plants as the PWEC Dedicated Assets. SunCor, our real estate development subsidiary, has been and is expected to be an important
source of earnings and cash flow, particularly during the years 2003 through 2005 due to
accelerated asset sales activity. Our subsidiary, APS Energy Services, provides competitive commodity-related energy services
and energy-related products and services to commercial and industrial retail customers in the
western United States. El Dorado, our investment subsidiary, sold its investment in NAC on November 18, 2004, which
resulted in a pretax gain of $4 million and the classification of NAC as discontinued operations in
2004. In addition, the year ended December 31, 2004 includes a $35 million gain ($21 million after
tax) related to the sale of El Dorados limited partnership interest in the Phoenix Suns. We continue to focus on solid operational performance in our electricity generation and
delivery activities. In the generation area, 2004 represented the thirteenth consecutive year Palo
Verde was the largest power producer in the United States. In the delivery area, we focus on
superior reliability and customer satisfaction while expanding our transmission and distribution
system to 30




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##### Table of Contents



meet growth and sustain
reliability. We plan to expand long-term resources to meet our retail
customers growing electricity needs. We believe APS general rate case pending before the ACC is the key issue affecting our
outlook. As discussed in greater detail in Note 3, on August 18, 2004, a substantial majority of
the parties to the rate case, including APS, the ACC staff, the Arizona Residential Utility
Consumer Office, other customer and advocacy groups, and merchant power plant intervenors entered
into the 2004 Settlement Agreement, which proposes terms under which the rate case would be
settled. Neither Pinnacle West nor APS is able to predict whether the ACC will approve the 2004
Settlement Agreement as proposed. Other factors affecting our past and future financial results include customer growth;
purchased power and fuel costs; operations and maintenance expenses, including those relating to
plant and transmission outages; weather variations; depreciation and amortization expenses, which
are affected by net additions to utility plant and other property and changes in regulatory asset
amortization; and the performance of our subsidiaries. EARNINGS CONTRIBUTIONS BY BUSINESS SEGMENTS We have three principal business segments (determined by services and the regulatory
environment):  
    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;
    our marketing and trading segment, which consists of our competitive energy business
activities, including wholesale marketing and trading and APS Energy Services
commodity-related energy services; and
    our real estate segment, which consists of SunCors real estate development and
investment activities. The following table summarizes income
from continuing operations by segment and net income for the years ended December 31,
2004, 2003 and 2002 (dollars in millions): 2004
    
    
    2003
    
    
    2002Regulated electricity (a)
    
    $
    151
    
    
    $
    170
    
    
    $
    170Marketing and trading
    
    
    18
    
    
    
    9
    
    
    
    58Real estate
    
    
    40
    
    
    
    45
    
    
    
    10Other (b)
    
    
    26
    
    
    
    2
    
    
    
    (1
    )Income from continuing operations
    
    
    235
    
    
    
    226
    
    
    
    237Real estate discontinued operations  net of income taxes (c)
    
    
    4
    
    
    
    10
    
    
    
    9Other
discontinued operations  net of income taxes (c)
    
    
    4
    
    
    
    5
    
    
    
    (31
    )Cumulative effect of change in accounting  net
of income taxes (d)
    
    
    
    
    
    
    
    
    
    
    (66
    )Net income
    
    $
    243
    
    
    $
    241
    
    
    $
    149
 31




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##### Table of Contents



(a)
    In 2002, Pinnacle West Energy recorded a charge related to the cancellation of
Redhawk Units 3 and 4 of approximately $30 million after income taxes ($49 million
pretax).(b)
    The year-ended 2004 includes a $35 million gain ($21 million after-tax) related
to the sale of El Dorados limited partnership interest in the Phoenix Suns.(c)
    Discontinued operations relate to NAC and real estate. See Note 22.(d)
    Marketing and trading segment change in accounting for trading activities upon adoption of EITF 02-3, Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities. See Note 18. See Note 17 for additional financial information regarding our business segments. PINNACLE WEST CONSOLIDATED  RESULTS OF OPERATIONS General Throughout the following explanations of our results of operations, we refer to gross
margin. With respect to our regulated electricity segment and our marketing and trading segment,
gross margin refers to electric operating revenues less purchased
power and fuel costs. Gross margin is a non-GAAP
financial measure, as defined in accordance with SEC rules. Operating margin (a GAAP financial measure) plus
other operating expenses, as disclosed in Note 17, is
equal to gross margin. We view gross margin as an important performance measure
of the core profitability of our operations. This measure is a key component of our internal
financial reporting and is used by our management in analyzing our business segments. We believe
that investors benefit from having access to the same financial measures that our management uses.
In addition, we have reclassified certain prior period amounts to conform to our current period
presentation. 2004 Compared with 2003 Our consolidated net income for the twelve months ended December 31, 2004 was $243 million
compared with $241 million for the prior-year period. The $2 million increase in the
period-to-period comparison reflected the following changes in earnings by segment:  
    Regulated Electricity Segment  Net income decreased approximately $19 million
primarily due to higher costs (primarily interest expense, depreciation, operation and
maintenance costs and property taxes, net of gross margin contributions) related to a
new power plant placed in service in mid-2003; increased operations and maintenance
costs primarily related to customer service and personnel costs; lower income tax
credits; higher depreciation related to delivery and other assets; the effects of
milder weather on retail sales; and a retail electricity rate decrease in mid-2003.
These negative factors were partially offset by lower regulatory asset amortization,
and higher retail sales volumes due to customer growth and usage. 32




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##### Table of Contents




    Marketing and Trading Segment  Net income increased approximately $9 million
primarily due to higher forward and realized prices for wholesale electricity partially
offset by lower margins in California by APS Energy Services and increased costs
related to a new power plant placed in service in mid-2004.  
    Real Estate Segment  Net income decreased approximately $11 million primarily due
to the 2003 gain on the sale of SunCors water utility company, which was reported as
discontinued operations (see Note 22), and decreased asset sales partially offset by
increased land sales.  
    Other Segment  Net income increased approximately $23 million primarily due to a
$21 million after-tax gain related to the sale of El Dorados limited partnership
interest in the Phoenix Suns. 33




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Additional details on the major factors that increased (decreased) income from continuing
operations and net income are contained in the following table (dollars in millions). Increase (Decrease)Pretax
    
    
    After TaxRegulated electricity segment gross margin:Higher retail sales volumes due to customer growth, excluding
weather effects
    
    $
    43
    
    
    $
    26Lower replacement power costs due to fewer unplanned outages
    
    
    6
    
    
    
    4Effects of weather on retail sales
    
    
    (17
    )
    
    
    (10
    )Retail electricity price reduction effective July 1, 2003
    
    
    (13
    )
    
    
    (8
    )Increased purchased power and fuel costs due to higher fuel and
power prices
    
    
    (4
    )
    
    
    (2
    )Miscellaneous factors, net
    
    
    (8
    )
    
    
    (6
    )Net increase in regulated electricity segment gross margin
    
    
    7
    
    
    
    4Marketing and trading segment gross margin:Higher mark-to-market gains on contracts for future delivery due to higher
forward prices for wholesale electricity
    
    
    28
    
    
    
    17Higher realized margins on energy trading primarily due to higher electricity
prices
    
    
    18
    
    
    
    11Increase in generation sales other than Native Load due to higher sales
volumes and higher unit margins
    
    
    9
    
    
    
    5Lower unit margins and lower competitive retail sales volumes in California
by APS Energy Services
    
    
    (22
    )
    
    
    (13
    )Net increase in marketing and trading segment gross margin
    
    
    33
    
    
    
    20Net increase in gross margin for regulated electricity and marketing and
trading segments
    
    
    40
    
    
    
    24Lower real estate segment contributions primarily due to decreased asset sales,
a portion of which was recorded in other income in the prior period, partially
offset by higher land sales (see Note 22)
    
    
    (7
    )
    
    
    (5
    )Higher other income due to the sale of El Dorados limited partnership interest
in the Phoenix Suns
    
    
    35
    
    
    
    21Higher operations and maintenance expense primarily related to
customer service costs, new power plants in service and personnel costs
    
    
    (48
    )
    
    
    (29
    )Interest expense net of capitalized financing costs, decreases (increases):New power plants in service
    
    
    (23
    )
    
    
    (14
    )Lower other debt balances and rates partially offset by increased
utility plant in service
    
    
    9
    
    
    
    5Depreciation and amortization decreases (increases):Lower regulatory asset amortization
    
    
    68
    
    
    
    41New power plants in service
    
    
    (14
    )
    
    
    (8
    )Increased delivery and other assets
    
    
    (20
    )
    
    
    (12
    )Higher property taxes due to increased plant in service
    
    
    (12
    )
    
    
    (7
    )Lower income tax credits
    
    
    
    
    
    
    (17
    )Miscellaneous items, net
    
    
    8
    
    
    
    10Net increase in income from continuing operations
    
    $
    36
    
    
    
    9Discontinued operations (primarily real estate segment, see Note 22)
    
    
    
    
    
    
    (7
    )Net increase in net income
    
    
    
    
    
    $
    2
 The increase in net costs (primarily interest expense, depreciation and operations and
maintenance expense, net of gross margin contributions) related to new power plants placed in
service in mid-2003 and mid-2004 by Pinnacle West Energy totaled approximately $26 million after
income taxes in the twelve months ended December 31, 2004 compared with the prior-year period. 34




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##### Table of Contents



Regulated Electricity Segment Revenues Regulated electricity segment revenues were $57 million higher for the twelve months ended
December 31, 2004 compared with the prior-year period primarily as a result of:  
    a $101 million increase in retail revenues related to customer growth
and higher average usage, excluding weather effects;
    a $42 million decrease in retail revenues related to milder weather;
    a $13 million decrease in retail revenues related to a reduction in
retail electricity prices; and
    an $11 million increase due to miscellaneous factors. Marketing and Trading Segment Revenues Marketing and trading segment revenues were $70 million higher for the twelve months ended
December 31, 2004 compared with the prior-year period primarily as a result of:  
    a $47 million increase from generation sales other than Native Load
primarily due to higher wholesale market prices and higher sales volumes, including
sales from the new power plants in service;
    $28 million in higher mark-to-market gains for future-period deliveries
primarily as a result of higher forward prices for wholesale electricity;
    $20 million of higher energy trading revenues on realized sales of
electricity primarily due to higher electricity prices; and
    a $25 million decrease from lower competitive retail sales volumes in
California by APS Energy Services. Other Revenues Other revenues were $15 million higher for the twelve months ended December 31, 2004 compared
with the prior-year period primarily due to higher non-commodity revenues at APS Energy Services. 2003 Compared with 2002 Our consolidated net income for the year ended December 31, 2003 was $241 million compared
with $149 million for the prior year. The 2003 net income included $15 million of after-tax income
from discontinued operations related to NAC and SunCor. The 2002 net income included a $21
million after-tax loss from discontinued operations related to NAC and SunCor (see Note 22). The
2002 net income also included a $66 million after-tax charge for the cumulative effect of a change
in accounting for trading activities due to the adoption of EITF 02-3, Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities (see Note 18). Excluding the discontinued operations and 35




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##### Table of Contents



the accounting change, the $11 million decrease in the period-to-period comparison reflects
the following changes in earnings by segment:  
    Regulated Electricity Segment  Income from continuing operations was flat when
comparing the two years, due to offsetting factors. Net income in 2003 was negatively
impacted by higher purchased power and fuel costs resulting from higher prices for
hedged gas and purchased power; higher costs related to new power plants, net of
purchased power savings; higher replacement power costs from plant outages due to
higher market prices and more unplanned outages (Cholla Unit 3 experienced an unplanned
outage from August 3, 2003 through November, 2003 and Units 1 and 2 of the Redhawk
Power Plant were substantially restricted for almost one-half of the fourth quarter to
correct an equipment design defect); higher operations and maintenance costs related to
increased pension and other benefits; two retail electricity price reductions; and
higher depreciation expense related to increased delivery and other assets. These
negative factors were offset by higher retail sales primarily due to customer growth
and favorable weather; the absence of the 2002 write-off of Redhawk Units 3 and 4;
lower operating costs primarily related to severance costs recorded in 2002; lower
regulatory asset amortization; tax credits and favorable income tax adjustments related
to prior years resolved in 2003; and higher income related to APS return to the AFUDC
method of capitalizing construction finance costs.  
    Marketing and Trading Segment  Income from continuing operations decreased
approximately $49 million primarily due to lower market liquidity and deteriorating
counterparty credit in the wholesale power markets in the western United States.  
    Real Estate Segment  Income from continuing operations improved approximately $35
million primarily due to increased asset, land and home sales.  
    Other Segment  Income from continuing operations increased approximately $3 million
primarily due to El Dorado Investment losses recognized in 2002. 36




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##### Table of Contents



Additional details on the major factors that increased (decreased) income from continuing
operations and net income for the year ended December 31, 2003 compared with the prior year are
contained in the following table (dollars in millions). Increase (Decrease)Pretax
    
    
    After TaxRegulated electricity segment gross margin:Increased purchased power and fuel costs primarily due to higher prices
for hedged gas and purchased power
    
    $
    (60
    )
    
    $
    (36
    )Higher replacement power costs from plant outages due to higher market
prices and more unplanned outages
    
    
    (47
    )
    
    
    (28
    )Retail electricity price reductions effective July 1, 2002 and July 1, 2003
    
    
    (27
    )
    
    
    (16
    )Higher retail sales volumes due to customer growth, excluding weather
effects
    
    
    48
    
    
    
    29Decreased purchased power costs due to new power plants in service
    
    
    16
    
    
    
    10Effects of weather on retail sales
    
    
    13
    
    
    
    8Miscellaneous factors, net
    
    
    5
    
    
    
    2Net decrease in regulated electricity segment gross margin
    
    
    (52
    )
    
    
    (31
    )Marketing and trading segment gross margin:Lower mark-to-market gains for future delivery due to lower market
liquidity and deteriorating counterparty credit
    
    
    (59
    )
    
    
    (35
    )Lower realized margins on wholesale sales primarily due to lower unit
margins, partially offset by higher volumes
    
    
    (32
    )
    
    
    (19
    )Higher margin related to structured contracts originated in prior years
    
    
    13
    
    
    
    7Decrease in generation sales other than Native Load primarily due to lower
unit margins partially offset by higher sales volumes, including sales
from new power plants in service
    
    
    (7
    )
    
    
    (4
    )Net decrease in marketing and trading segment gross margin
    
    
    (85
    )
    
    
    (51
    )Net decrease in regulated electricity and marketing and trading segments
gross margins
    
    
    (137
    )
    
    
    (82
    )Higher income primarily related to El Dorado Investment losses recognized in 2002
    
    
    8
    
    
    
    5Higher real estate segment contribution primarily due to higher asset, land and
home sales
    
    
    58
    
    
    
    36Operations and maintenance expense decreases (increases):Write-off of Redhawk Units 3 and 4 in 2002
    
    
    47
    
    
    
    28Severance costs recorded in 2002
    
    
    36
    
    
    
    21Increased pension and other benefit costs
    
    
    (28
    )
    
    
    (17
    )Costs for new power plants in service
    
    
    (20
    )
    
    
    (12
    )Net other items
    
    
    1
    
    
    
    1Higher interest expense and lower capitalized interest primarily related to new
power plants in service
    
    
    (26
    )
    
    
    (16
    )Depreciation and amortization decreases (increases):New power plants in service
    
    
    (19
    )
    
    
    (11
    )Increased delivery and other assets
    
    
    (22
    )
    
    
    (13
    )Decreased regulatory asset amortization
    
    
    29
    
    
    
    17APS return to the AFUDC method of capitalizing construction finance costs
    
    
    8
    
    
    
    11Miscellaneous items, net
    
    
    5
    
    
    
    4Tax credits and favorable income tax adjustments related to prior years resolved
in 2003
    
    
    
    
    
    
    17Net decrease in income from continuing operations
    
    $
    (60
    )
    
    
    (11
    )Discontinued operations (primarily NAC, see Note 22)
    
    
    
    
    
    
    37Increase due to 2002 cumulative effect of a change in accounting for trading
activities
    
    
    
    
    
    
    66Net increase in net income
    
    
    
    
    
    $
    92
 37




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##### Table of Contents



The increase in operating and interest costs related to new power plants placed in
service by Pinnacle West Energy, net of purchased power savings and increased gross margin from
generation sales other than Native Load, totaled approximately $30 million after income taxes in
the year ended December 31, 2003 compared with the prior-year period. Regulated Electricity Segment Revenues Regulated electricity segment revenues were $88 million higher in the year ended December 31,
2003 compared with the prior year, primarily as a result of:  
    an $85 million increase in retail revenues related to customer growth
and higher average usage, excluding weather effects;  
    a $21 million increase in retail revenues related to weather;  
    a $6 million increase related to traditional wholesale sales as a result
of higher prices and higher sales volumes;  
    a $27 million decrease in retail revenues related to two reductions in
retail electricity prices; and  
    a $3 million net increase due to miscellaneous factors. Marketing and Trading Segment Revenues Marketing and trading segment revenues were $105 million higher in the year ended December 31,
2003 compared with the prior year, primarily as a result of:  
    $74 million of higher revenues related to the adoption of EITF 02-3 in
the fourth quarter of 2002, primarily due to structured contracts that were reported
gross in the current period and net in most of the prior period;  
    a $69 million increase from higher competitive retail sales in
California by APS Energy Services;  
    a $38 million increase from generation sales other than Native Load
primarily due to higher prices and sales volumes, including sales from new power plants
in service;  
    $59 million in lower mark-to-market gains for future-period deliveries
primarily as a result of lower market liquidity and lower price volatility; and  
    $17 million of lower realized wholesale revenues primarily due to lower
unit margins on trading activities that are reported on a net basis. 38




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##### Table of Contents



Real Estate Segment Revenues Real estate segment revenues were $161 million higher in the year ended December 31, 2003
compared with the prior year primarily as a result of increased asset, land and home sales related
to SunCors effort to accelerate asset sales. LIQUIDITY AND CAPITAL RESOURCES Capital Needs and Resources  Pinnacle West Consolidated Capital Expenditure Requirements The following table summarizes the actual capital expenditures for the year ended December 31,
2004 and estimated capital expenditures for the next three years. CAPITAL EXPENDITURES
(dollars in millions) Actual
    
    
    Estimated2004
    
    
    2005
    
    
    2006
    
    
    2007APS
Delivery
    
    $
    342
    
    
    $
    390
    
    
    $
    395
    
    
    $
    440Generation (a) (b)
    
    
    113
    
    
    
    352
    
    
    
    158
    
    
    
    195Other (c)
    
    
    29
    
    
    
    30
    
    
    
    7
    
    
    
    6Subtotal
    
    
    484
    
    
    
    772
    
    
    
    560
    
    
    
    641Pinnacle West Energy (a)
    
    
    31
    
    
    
    7
    
    
    
    5
    
    
    
    2SunCor (d)
    
    
    81
    
    
    
    114
    
    
    
    61
    
    
    
    63Other
    
    
    2
    
    
    
    8
    
    
    
    7
    
    
    
    4Total
    
    $
    598
    
    
    $
    901
    
    
    $
    633
    
    
    $
    710
   (a)
    
    As discussed in Note 3 under APS General Rate Case; 2004 Settlement Agreement, as part of
its general rate case, APS has requested rate base treatment of the PWEC Dedicated Assets.
The estimated capital expenditures related to the PWEC Dedicated Assets are reflected in APS
for the years 2005, 2006 and 2007.(b)
    
    The estimate for 2005 includes about $190 million for acquisition of the Sundance Plant. See
Request for Proposals and Asset Purchase Agreement in Note 3 for a discussion of the asset
purchase agreement between APS and PPL Sundance.(c)
    
    Primarily information systems and facilities projects.(d)
    
    Consists primarily of capital expenditures for land development and retail and office
building construction reflected in Real estate investments on the Consolidated Statements of
Cash Flows. Delivery capital expenditures are comprised of T&D infrastructure additions and upgrades,
capital replacements, new customer construction and related information systems and facility costs.
Examples of the types of projects included in the forecast include T&D lines and substations, line
extensions to new residential and commercial developments and upgrades to customer information
systems. Major transmission projects are driven by strong regional customer growth. 39




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##### Table of Contents



Generation capital expenditures are comprised of various improvements to APS existing fossil
and nuclear plants, the acquisition of the Sundance Plant and the replacement of Palo Verde steam
generators (see below). Examples of the types of projects included in this category are additions,
upgrades and capital replacements of various power plant equipment such as turbines, boilers and
environmental equipment. Generation also includes nuclear fuel expenditures of approximately $30
million annually for 2005 to 2007. Replacement of the steam generators in Palo Verde Unit 2 was completed during the fall outage
of 2003 at a cost to APS of approximately $70 million. The Palo Verde owners have approved the
manufacture of two additional sets of steam generators. These generators will be installed in Unit
1 (scheduled completion in the fall of 2005) and Unit 3 (scheduled completion in the fall of 2007).
Our portion of steam generator expenditures for Units 1 and 3 is approximately $140 million, which
will be spent through 2008. In 2005 through 2007, approximately $95 million of the costs for steam
generator replacements at Units 1 and 3 are included in the generation capital expenditures table
above and will be funded with internally-generated cash or external financings. Contractual Obligations The following table summarizes Pinnacle Wests consolidated contractual requirements as of
December 31, 2004 (dollars in millions): 2006-
    
    
    2008-2005
    
    
    2007
    
    
    2009
    
    
    Thereafter
    
    
    TotalLong-term debt payments,
including interest: (a)APS
    
    $
    577
    
    
    $
    503
    
    
    $
    206
    
    
    $
    2,746
    
    
    $
    4,032Pinnacle West
    
    
    189
    
    
    
    305
    
    
    
    
    
    
    
    
    
    
    
    494SunCor
    
    
    2
    
    
    
    9
    
    
    
    6
    
    
    
    
    
    
    
    17Total long-term debt payments,
including interest
    
    
    768
    
    
    
    817
    
    
    
    212
    
    
    
    2,746
    
    
    
    4,543Short-term debt payments,
including interest (b)
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72Capital lease payments
    
    
    2
    
    
    
    3
    
    
    
    2
    
    
    
    3
    
    
    
    10Operating lease payments
    
    
    73
    
    
    
    139
    
    
    
    132
    
    
    
    368
    
    
    
    712Minimum pension funding
requirement (c)
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Purchase power and fuel
commitments (d)
    
    
    187
    
    
    
    171
    
    
    
    134
    
    
    
    363
    
    
    
    855Purchase obligations (e)
    
    
    272
    
    
    
    16
    
    
    
    
    
    
    
    68
    
    
    
    356Nuclear decommissioning funding
requirements
    
    
    11
    
    
    
    22
    
    
    
    22
    
    
    
    146
    
    
    
    201Total contractual commitments
    
    $
    1,435
    
    
    $
    1,168
    
    
    $
    502
    
    
    $
    3,694
    
    
    $
    6,799
   (a)
    
    The long-term debt matures at various dates through 2034 and bears interest principally at
fixed rates. Interest on variable-rate long-term debt is determined by using the rates at
December 31, 2004.(b)
    
    The short-term debt matures within 12 months. The weighted-average interest rate used to
determine interest payments on the short-term debt was 4.21% at December 31, 2004. 40




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##### Table of Contents



(c)
    
    Future pension contributions are not determinable for time periods after 2005.(d)
    
    Our purchase power and fuel 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. Obligations for 2005 include about $190 million for acquisition of the Sundance
Plant (see Note 3). Off-Balance Sheet Arrangements In 1986, APS entered into agreements with three separate VIE lessors in order to sell and
lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in
accordance with GAAP. See Note 9 for further information about the sale leaseback transactions.
We are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate
them. APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of
certain events that APS does not consider to be reasonably likely to occur. Under certain
circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde
or the occurrence of specified nuclear events), APS would be required to assume the debt associated
with the transactions, make specified payments to the equity participants, and take title to the
leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If
such an event had occurred as of December 31, 2004, APS would have been required to assume
approximately $250 million of debt and pay the equity participants approximately $192 million. In the first quarter of 2004, we adopted FIN No. 46R, Consolidation of Variable Interest
Entities for all non-SPE contractual arrangements. SunCor has certain land development
arrangements that are required to be consolidated under FIN No. 46R. The assets and non-controlling
interests reflected in our Consolidated Balance Sheets related to these arrangements were
approximately $34 million at December 31, 2004. Guarantees and Letters of Credit We and certain of our subsidiaries have issued guarantees and letters of credit in support of
our unregulated businesses. We have also obtained surety bonds on behalf of APS Energy Services. We have not
recorded any liability on our Consolidated Balance Sheets with
respect to these obligations. We generally provide indemnifications related to liabilities arising from or related to certain of
our agreements, with limited exceptions depending on the particular agreement. See
Note 21 for additional information regarding guarantees and letters of credit. Credit Ratings The
ratings of securities of Pinnacle West and APS as of March 15, 2005 are shown below and
are considered to be investment-grade ratings. The ratings reflect the respective views of the
rating agencies, from which an explanation of the significance of their ratings may be obtained.
There is no assurance that these ratings will continue for any given period of time. The ratings
may be revised or withdrawn entirely by the rating agencies, if, in their respective judgments,
circumstances so warrant. Any downward revision or withdrawal may adversely affect the market
price of Pinnacle Wests or APS securities and serve to increase those companies cost of and
access 41




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##### Table of Contents



to capital. It may also require additional collateral related to certain derivative instruments
(see Note 18). Moodys
    
    Standard & PoorsPinnacle WestSenior unsecured
    
    Baa2
    
    BBB-Commercial paper
    
    P-2
    
    A-2Outlook
    
    Negative
    
    NegativeAPSSenior unsecured
    
    Baa1
    
    BBBSecured lease
obligation bonds
    
    Baa2
    
    BBBCommercial paper
    
    P-2
    
    A-2Outlook
    
    Negative
    
    Negative
 APS no longer has any senior secured debt. See Capital Needs and Resources  By Company 
APS below for a discussion of the termination of APS mortgage and deed of trust. Debt Provisions Pinnacle Wests and APS debt covenants related to their respective bank financing
arrangements include a debt-to-total-capitalization ratio and an interest coverage test. Pinnacle
West and APS comply with these covenants and each anticipates it will continue to meet these and
other significant covenant requirements. These covenants require that the ratio of debt to total
capitalization cannot exceed 65% for the Company and for APS. At December 31, 2004, the ratio was
approximately 53% for Pinnacle West and 54% for APS. The provisions regarding interest coverage
require a minimum cash coverage of two times the interest requirements for each of the Company and
APS. Based on 2004 results, the coverages were approximately 4 times for the Company and 4 times
for APS. Failure to comply with such covenant levels would result in an event of default which,
generally speaking, would require the immediate repayment of the debt subject to the covenants. Neither Pinnacle Wests nor APS financing agreements contain ratings triggers that would
result in an acceleration of the required interest and principal payments in the event of a ratings
downgrade. However, in the event of a ratings downgrade, Pinnacle West and/or APS may be subject
to increased interest costs under certain financing agreements. All of Pinnacle Wests bank agreements contain cross-default provisions that would result in
defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or
APS were to default under other agreements. All of APS bank agreements contain cross-default
provisions that would result in defaults and the potential acceleration of payment under these bank
agreements if APS were to default under other agreements. Pinnacle Wests and APS credit
agreements generally contain provisions under which the lenders could refuse to advance loans in
the event of a material adverse change in financial condition or financial prospects, except that
Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings
equal to outstanding commercial paper amounts. 42




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##### Table of Contents



See Note 6 for further discussions. Capital Needs and Resources  By Company Pinnacle West (Parent Company) Our primary cash needs are for dividends to our shareholders; interest payments and optional
and mandatory repayments of principal on our long-term debt (see the table above for our
contractual requirements, including our debt repayment obligations, but excluding optional
repayments). On October 20, 2004, our Board of Directors increased the common stock dividend to an
indicated annual rate of $1.90 per share from $1.80 per share, effective with the December 1, 2004
dividend payment. The level of our common dividends and future dividend growth will be dependent
on a number of factors including, but not limited to, payout ratio trends, free cash flow and
financial market conditions. Our primary sources of cash are dividends from APS, external financings and cash distributions
from our other subsidiaries, primarily SunCor. For the years 2002 through 2004, total dividends
from APS were $510 million and total cash distributions from SunCor were $206 million. For the
year ended December 31, 2004, dividends from APS were approximately $170 million and distributions
from SunCor were approximately $85 million. We expect SunCor to make cash distributions to the
parent company of approximately $80 to $100 million in 2005 based on anticipated asset sales
activities. As discussed in Note 3 under ACC Financing Orders, APS must maintain a common equity
ratio of at least 40% and may not pay common dividends if the payment would reduce its common
equity below that threshold. As defined in the Financing Order, common equity ratio is common
equity divided by common equity plus long-term debt, including current maturities of long-term
debt. At December 31, 2004, APS common equity ratio as defined was approximately 45%. On February 2, 2004, we used proceeds from the $165 million Floating Rate Notes issued on
November 12, 2003 and short-term borrowings to pay down the maturing $215 million 4.5% Senior Notes
due 2004. At December 31, 2004, the parent companys outstanding long-term debt, including current
maturities, was $468 million. In October 2004, we replaced two separate revolving credit
facilities (with collective borrowing capacity of $275 million) with a $300 million revolving
credit facility that terminates in October 2007. This line of credit is available to support the
issuance of up to $250 million in commercial paper or to be used as bank borrowings, including up
to $100 million for issuances of letters of credit. At December 31, 2004, we had no commercial
paper or short-term borrowings outstanding. We ended 2004 in an invested position. Pinnacle West sponsors a qualified pension plan for the employees of Pinnacle West and our
subsidiaries. We contribute at least the minimum amount required under IRS regulations, but no
more than the maximum tax-deductible amount. The minimum required funding takes into consideration
the value of the fund assets and our pension obligation. We contributed $35 million in 2004, $46
million in 2003, $27 million in 2002, $44 million in 2001 and $24 million in 2000. APS and other
subsidiaries fund their share of the pension contribution, of which APS represents approximately
92% of the total funding amounts described above. The assets in the plan are comprised of common
stocks, bonds and real estate. Future year contribution amounts are dependent 43




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on fund performance and fund valuation assumptions. The minimum required contribution to be made
to our pension plan in 2005 is estimated to be approximately $50 million. The expected
contribution to our other postretirement benefit plans in 2005 is estimated to be approximately $40
million. APS APS capital requirements consist primarily of capital expenditures and optional and mandatory
redemptions of long-term debt. See ACC Financing Order in Note 3 for a discussion of the $500
million financing arrangement between APS and Pinnacle West Energy authorized by the ACC pursuant
to the Financing Order. APS pays for its capital requirements with cash from operations and, to the extent necessary,
external financings. APS has historically paid for its dividends to Pinnacle West with cash from
operations. See Pinnacle West (Parent Company) above for a discussion of the common equity ratio
that APS must maintain in order to pay dividends to Pinnacle West. On February 15, 2004, $125 million of APS 5.875% notes due 2004 were redeemed at maturity and
on March 1, 2004, $80 million of APS First Mortgage Bonds, 6.625% Series due 2004 were redeemed at
maturity. APS used cash from operations and short-term debt to redeem the maturing debt. On March 31, 2004, Navajo County, Arizona Pollution Control Corporation issued $166 million of
variable interest rate pollution control bonds, 2004 Series A-E, due 2034. The bonds were issued
to refinance $166 million of outstanding pollution control bonds. The refinanced bonds were all
$25 million of the Navajo 5.50% bonds due 2028 and $141 million of the Navajo 5.875% bonds due
2028. The Series A-E bonds are payable solely from revenues obtained from APS pursuant to a loan
agreement between APS and Navajo County, Arizona Pollution Control Corporation. These bonds are
classified as long-term debt on our Consolidated Balance Sheets. See Note 6. Also on March 31, 2004, Coconino County, Arizona Pollution Control Corporation issued $13
million of variable interest rate pollution control bonds, 2004 Series A, due 2034. The bonds were
issued to refinance $13 million of outstanding pollution control bonds. The refinanced bonds were
$13 million of the Coconino 5.875% bonds due 2028. The Series A bonds are payable solely from
revenues obtained from APS pursuant to a loan agreement between APS and Coconino County, Arizona
Pollution Control Corporation. These bonds are classified as long-term debt on our Consolidated
Balance Sheets. See Note 6. In May 2004, APS renewed its $250 million revolving credit facility, while increasing its size
to $325 million and extending its term to three years. The revolver provides liquidity support for
APS $250 million commercial paper program, as well as an additional $75 million for other
liquidity needs and miscellaneous letters of credit. On June 29, 2004, APS issued $300 million of 5.80% senior unsecured notes due June 30, 2014.
The proceeds from the sale of the notes were used to redeem $100 million in aggregate principal
amount of APS 6.25% Notes due January 15, 2005 and a portion of $300 million in aggregate
principal amount of APS 7.625% Notes due August 1, 2005. 44




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##### Table of Contents



On March 1, 2005, Maricopa County, Arizona Pollution Control Corporation issued $164 million
of variable interest rate pollution control bonds, 2004 Series A-E, due 2029. The bonds were
issued to refinance $164 million of outstanding pollution control bonds. The Series A-E bonds are
payable solely from revenues obtained from APS pursuant to a loan agreement between APS and
Maricopa County, Arizona Pollution Control Corporation. These bonds are classified as long-term
debt on our Consolidated Balance Sheets. APS has retired all first mortgage bonds issued by APS under its 1946 mortgage and deed of
trust, including the first mortgage bonds securing APS senior notes. On April 30, 2004, APS
terminated its mortgage and deed of trust and, as a result, is not able to issue any additional
first mortgage bonds under that mortgage. APS outstanding debt was approximately $2.7 billion at December 31, 2004. APS had committed
lines of credit with various banks of $325 million at December 31, 2004 which were available either
to support the issuance of commercial paper or to be used for bank borrowings, including issuances
of letters of credit. At December 31, 2004, APS had no outstanding commercial paper or bank
borrowings. APS ended 2004 in an invested position. Although provisions in APS articles of incorporation and ACC financing orders establish
maximum amounts of preferred stock and debt that APS may issue, APS does not expect any of these
provisions to limit its ability to meet its capital requirements. Pinnacle West Energy Pinnacle West Energys capital requirements consist primarily of capital expenditures. In May
2004, SNWA paid Pinnacle West Energy approximately $91 million for a 25% interest in the 570 MW
Silverhawk combined cycle plant. See the capital expenditures table above for actual capital
expenditures for 2004 and projected capital expenditures for the next three years. Pinnacle West
Energys sources of cash will be cash infusions from the parent and cash from operations. See ACC Financing Order in Note 3 for a discussion of the $500 million financing arrangement
between APS and Pinnacle West Energy authorized by the ACC pursuant to the Financing Order. Other Subsidiaries During the past three years, SunCor funded its cash requirements with cash from operations and
its own external financings. SunCors capital needs consist primarily of capital expenditures for
land development and retail and office building construction. See the capital expenditures table
above for actual capital expenditures in 2004 and projected capital expenditures for the next three
years. SunCor expects to fund its capital requirements with cash from operations and external
financings. In 2004, SunCor did not issue any long-term debt; and it redeemed, refinanced or repaid $2
million in long-term debt (see Note 6). SunCors total outstanding debt was approximately $87 million as of December 31, 2004.
SunCors total short-term debt was $71 million at December 31, 2004, including $35 million of 45




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##### Table of Contents



short-term borrowings outstanding under a $90 million line of credit. SunCors long-term
debt, including current maturities, totaled $16 million at December 31, 2004. We expect SunCor to make cash distributions to the parent company of approximately $80 to $100
million in 2005 based on anticipated asset sales activities. El Dorado funded its cash requirements during the past three years, primarily for NAC in 2002,
with cash infused by the parent company and with cash from operations. As described above, during
2004, El Dorado sold its limited partnership interest in the Phoenix Suns and its ownership
interest in NAC. El Dorado expects minimal capital requirements over the next three years and
intends to focus on prudently realizing the value of its existing investments. APS Energy Services cash requirements during the past three years were funded with cash
infusions from the parent company and with cash from operations. CRITICAL ACCOUNTING POLICIES In preparing the financial statements in accordance with GAAP, management must often make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the date of the financial statements and during the reporting
period. Some of those judgments can be subjective and complex, and actual results could differ
from those estimates. We consider the following accounting policies to be our most critical
because of the uncertainties, judgments and complexities of the underlying accounting standards and
operations involved. 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. We had $135 million of regulatory assets on the Consolidated Balance
Sheets at December 31, 2004. A component of the 2004 Settlement Agreement, which is subject to ACC
approval, would allow APS to acquire the PWEC Dedicated Assets from Pinnacle West Energy, with a
net carrying value of approximately $850 million, and rate base the PWEC Dedicated Assets at a rate
base value of $700 million. This would result in a mandatory rate base disallowance of
approximately $150 million. As a result, for financial reporting purposes, APS would recognize a
one-time, after-tax net plant write-off of approximately $90 million in the period when the plant
transfer to APS is completed and would reduce annual depreciation expense by approximately $5
million. See Notes 1 and 3 for more information about regulatory assets, APS general rate case
and the 2004 Settlement Agreement. 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 46




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##### Table of Contents



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. The following chart reflects the sensitivities that a change in certain actuarial assumptions
would have had on the 2004 projected benefit obligation, our 2004 reported pension liability on the
Consolidated Balance Sheets and our 2004 reported pension expense, after consideration of amounts
capitalized or billed to electric plant participants, on Pinnacle Wests Consolidated Statements of
Income (dollars in millions): Increase/(Decrease)Impact onProjected
    
    
    Impact on
    
    
    Impact onBenefit
    
    
    Pension
    
    
    PensionActuarial Assumption (a)
    
    Obligation
    
    
    Liability
    
    
    ExpenseDiscount rate:Increase 1%
    
    $
    (192
    )
    
    $
    (159
    )
    
    $
    (8
    )Decrease 1%
    
    
    220
    
    
    
    184
    
    
    
    8Expected long-term rate
of return on plan
assets:Increase 1%
    
    
    
    
    
    
    
    
    
    
    (4
    )Decrease 1%
    
    
    
    
    
    
    
    
    
    
    4
   (a)
    
    Each fluctuation assumes that the other assumptions of the calculation are held constant. The following chart reflects the sensitivities that a change in certain actuarial assumptions
would have had on the 2004 accumulated other postretirement benefit obligation and our 2004
reported other postretirement benefit expense, after consideration of amounts capitalized or billed
to electric plant participants, on Pinnacle Wests Consolidated Statements of Income (dollars in
millions): Increase/(Decrease)Impact on Accumulated
    
    
    Impact on OtherOther Postretirement
    
    
    PostretirementActuarial Assumption (a)
    
    Benefit Obligation
    
    
    Benefit ExpenseDiscount rate:Increase 1%
    
    $
    (80
    )
    
    $
    (4
    )Decrease 1%
    
    
    94
    
    
    
    4Health care cost trend
rate (b):Increase 1%
    
    
    96
    
    
    
    6Decrease 1%
    
    
    (76
    )
    
    
    (5
    )Expected long-term rate
of return on plan
assets  pretax:Increase 1%
    
    
    
    
    
    
    (1
    )Decrease 1%
    
    
    
    
    
    
    1
   (a)
    
    Each fluctuation assumes that the other assumptions of the calculation are held constant. 47




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##### Table of Contents



(b)
    
    This assumes a 1% change in the initial and ultimate health care cost trend rate. See Note 8 for further details about our pension and other postretirement benefit plans. Derivative Accounting Derivative accounting requires evaluation of rules that are complex and subject to varying
interpretations. Our 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, changes in the
fair value of the derivative are recognized in common stock equity (as a component of other
comprehensive income (loss)). The
fair value of our derivative contracts is not always readily
determinable. In some cases, we use models and other valuation
techniques to determine fair value. The use of these models and
valuation techniques sometimes requires subjective and complex
judgement. Actual results could differ from the results estimated
through application of these methods. Our marketing and trading
portfolio consists of structured activities hedged with a portfolio
of forward purchases that protects the economic value of the sales
transactions. See Market Risks  Commodity Price
Risk below for quantitative analysis. See Note 1 for
discussion on accounting policies and Note 18 for a further
discussion on derivative and energy trading accounting. OTHER ACCOUNTING MATTERS Accounting for Derivative and Trading Activities We adopted EITF 02-3 in the fourth quarter of 2002. We recorded a $66 million after-tax
charge in net income as a cumulative effect adjustment for the previously recorded accumulated
unrealized mark-to-market on energy trading contracts that did not meet the accounting definition
of a derivative. Our energy trading contracts that are derivatives are accounted for at fair value
under SFAS No. 133. Contracts that do not meet the definition of a derivative are now accounted
for on an accrual basis with the associated revenues and costs recorded at the time the contracted
commodities are delivered or received. See Notes 1 and 18 for further information on accounting for derivatives. Variable Interest Entities See Liquidity and Capital Resources  Off-Balance Sheet Arrangements and Note 20 for
a discussion of VIEs. PINNACLE WEST CONSOLIDATED  FACTORS AFFECTING OUR FINANCIAL OUTLOOK APS General Rate Case We believe APS general rate case, including the proposed settlement pending before the ACC is
the key issue affecting our outlook. See APS General Rate Case; 2004 Settlement Agreement in
Note 3 for a detailed discussion of this rate case and proposed settlement. Factors Affecting Operating Revenues, Purchased Power and Fuel Costs GeneralElectric operating revenues are derived from sales of electricity in regulated retail
markets in Arizona and from competitive retail and wholesale power markets in the western United
States. These revenues are affected by electricity sales volumes related to customer mix, customer
growth and average usage per customer as well as electricity prices and variations in weather from 48




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##### Table of Contents



period to period. Competitive sales of energy and energy-related products and services are made by
APS Energy Services in western states that have opened to competition. Customer and Sales GrowthThe customer and sales growth referred to in this paragraph applies
to Native Load customers and sales to them. Customer growth in APS service territory averaged
about 3.4% a year for the three years 2002 through 2004; we currently expect customer growth to
average about 3.8% per year from 2005 to 2007. We currently estimate that total retail electricity
sales in kilowatt-hours will grow 5.0% on average, from 2005 through 2007, before the effects of
weather variations. Customer growth for the year ended December 31, 2004 compared with the prior
year was 3.7%. Actual sales growth, excluding weather-related variations, may differ from our projections as
a result of numerous factors, such as economic conditions, customer growth and usage patterns. Our
experience indicates that a reasonable range of variation in our kilowatt-hour sales projection
attributable to such economic factors can result in increases or decreases in annual net income of
up to $10 million. Retail Rate ChangesAPS has a rate settlement agreement pending before the ACC that includes,
among other things, a proposed general rate increase of 4.21% and a power supply adjuster that
would provide timely recovery of variations in purchased power and fuel prices. See APS General
Rate Case; 2004 Settlement Agreement in Note 3. APS expects to
file another general rate case in late 2005. WeatherIn forecasting retail sales growth, we assume normal weather patterns
based on historical data. Historical extreme weather variations have resulted in
annual variations in net income in excess of $20 million. However, our experience indicates that
the more typical variations from normal weather can result in increases or decreases in annual
net income of up to $10 million. TradingIn accordance with GAAP, we adopted EITF 02-3,
Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities, in
the fourth quarter of 2002. As a
consequence, we are recording structured trading transactions completed prior to implementation of
EITF 02-3 that do not qualify as derivatives for financial accounting purposes on the accrual
method, recognizing the revenues and associated purchased power and fuel costs as the respective
commodities are delivered. We expect the deliveries under these historical contracts to contribute
the following amounts to net income: approximately $12 million each year in 2005 through 2007 and
approximately $7 million in 2008. Purchased Power and Fuel CostsPurchased power and fuel costs are impacted by our electricity
sales volumes, existing contracts for purchased power and generation fuel, our power plant
performance, transmission availability or constraints, prevailing market prices, new generating
plants being placed in service and our hedging program for managing such costs. See Natural Gas
Supply in Note 11 for more information on fuel costs. See APS General Rate Case; 2004 Settlement
Agreement in Note 3 for information regarding a power supply adjuster. Wholesale Power Market ConditionsThe marketing and trading division focuses primarily on
managing APS purchased power and fuel risks in connection with its costs of serving retail
customer demand. We moved this division to APS in early 2003 for future marketing and trading
activities (existing wholesale contracts remained at Pinnacle West) as a result of the ACCs 49




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##### Table of Contents



Track A Order prohibiting APS transfer of generating assets to Pinnacle West Energy.
Additionally, the marketing and trading division, subject to specified parameters, markets, hedges
and trades in electricity, fuels and emission allowances and credits. Our future earnings will be
affected by the strength or weakness of the wholesale power market. The market has suffered a
substantial reduction in overall liquidity because there are fewer creditworthy counterparties and
because several key participants have exited the market or scaled back their activities. Other Factors Affecting Financial Results Operations and Maintenance ExpensesOperations and maintenance expenses are impacted by
growth, power plant additions and operations, inflation, outages, higher trending pension and other
postretirement benefit costs and other factors. Depreciation and Amortization ExpensesDepreciation and amortization expenses are impacted by
net additions to utility plant and other property, which includes generation construction or
acquisition, and changes in regulatory asset amortization. Silverhawk was placed in service in May
2004. APS plans to acquire the Sundance Plant in 2005 and, in accordance with the proposed rate
settlement, to issue requests for proposals to acquire additional long-term resources in 2006 and
2007. As part of the 1999 Settlement Agreement, APS amortized certain regulatory assets over a
period that ended June 30, 2004. Amortization in the last three years is as follows (dollars in
millions): 2002
    
    2003
    
    2004$115
    
    $86
    
    $18
 Property TaxesTaxes other than income taxes consist primarily of property taxes, which are
affected by tax rates and the value of property in-service and under construction. The average
property tax rate for APS, which currently owns the majority of our property, was 9.2% of assessed
value for 2004 and 9.3% for 2003. We expect property taxes to increase primarily due to our
generation construction program, as the plants phase-in to the
property tax base, the planned acquisition of the Sundance Plant and our additions to existing facilities. Interest ExpenseInterest expense is affected by the amount of debt outstanding and the
interest rates on that debt. The primary factors affecting borrowing levels in the next several
years are expected to be our capital requirements and our internally generated cash flow.
Capitalized interest offsets a portion of interest expense while capital projects are under
construction. We stop accruing capitalized interest on a project when it is placed in commercial
operation. As noted above, we placed new power plants in commercial operation in 2001, 2002, 2003
and 2004. Interest expense is also affected by interest rates on variable-rate debt and interest
rates on the refinancing of the Companys future liquidity needs. In addition, see Note 1 for a
discussion of AFUDC. Retail CompetitionThe regulatory developments and legal challenges to the Rules discussed in
Note 3 have raised considerable uncertainty about the status and pace of retail electric
competition and of electric restructuring in Arizona. Although some very limited retail
competition existed in APS service area in 1999 and 2000, there are currently no active retail
competitors providing unbundled energy or other utility services to APS customers. As a result,
we cannot predict when, and the extent to which, additional competitors will re-enter APS service
territory. 50




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##### Table of Contents



SubsidiariesIn the case of SunCor, efforts to accelerate asset sales activities in
2004 were successful. A portion of these sales have been, and additional amounts may be required
to be, reported as discontinued operations on our Consolidated Statements of Income. SunCors net
income was $45 million in 2004. See Note 22 for further discussion. We anticipate SunCors
earnings contributions in 2005 to be approximately $50 million after income taxes. El Dorados historical results are not indicative of future performance. El Dorados income
before taxes in 2004 was $40 million. Income taxes were recorded
at the parent company. The year ended 2004 includes a $35 million gain ($21 million after tax) related to the
sale of El Dorados limited partnership interest in the Phoenix
Suns. El Dorado sold its investment in NAC on November 18, 2004,
which resulted in a pretax gain of $4 million and is classified
as discontinued operations in 2004 and prior years. See Note 22 for information
regarding the sale of NAC. GeneralOur financial results may be affected by a number of broad factors. See
Forward-Looking Statements for further information on such factors, which may cause our actual
future results to differ from those we currently seek or anticipate. Market Risks Our operations include managing market risks related to changes in interest rates, commodity
prices and investments held by our nuclear decommissioning trust fund. Interest Rate and Equity Risk Our major financial market risk exposure is to changing interest rates. Changing interest
rates will affect interest paid on variable-rate debt and interest earned by our nuclear
decommissioning trust fund (see Note 12). Our policy is to manage interest rates through the use
of a combination of fixed-rate and floating-rate debt. On January 29, 2004, we entered into two
fixed-for-floating interest rate swap transactions on our $300 million 6.4% senior note. These
transactions qualify as fair value hedges under SFAS No 133. See Note 6. The tables below present contractual balances of our consolidated long-term and short-term
debt at the expected maturity dates as well as the fair value of those instruments on December 31,
2004 and 2003. The interest rates presented in the tables below represent the weighted-average
interest rates for the years ended December 31, 2004 and 2003 (dollars in thousands): Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2004
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2005
    
    
    4.21
    %
    
    $
    71,030
    
    
    
    1.81
    %
    
    $
    214,967
    
    
    
    7.27
    %
    
    $
    402,1982006
    
    
    
    
    
    
    
    
    
    
    6.55
    %
    
    
    2,918
    
    
    
    6.45
    %
    
    
    395,3142007
    
    
    
    
    
    
    
    
    
    
    4.81
    %
    
    
    302
    
    
    
    5.99
    %
    
    
    1,1542008
    
    
    
    
    
    
    
    
    
    
    5.22
    %
    
    
    5,294
    
    
    
    5.51
    %
    
    
    1,0552009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.51
    %
    
    
    818Years thereafter
    
    
    
    
    
    
    
    
    
    
    1.31
    %
    
    
    516,340
    
    
    
    4.79
    %
    
    
    1,669,901Total
    
    
    
    
    
    $
    71,030
    
    
    
    
    
    
    $
    739,821
    
    
    
    
    
    
    $
    2,470,440Fair value
    
    
    
    
    
    $
    71,030
    
    
    
    
    
    
    $
    740,271
    
    
    
    
    
    
    $
    2,574,608
 51




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##### Table of Contents



Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2003
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2004
    
    
    4.26
    %
    
    $
    86,081
    
    
    
    1.57
    %
    
    $
    280,749
    
    
    
    5.33
    %
    
    $
    424,1652005
    
    
    
    
    
    
    
    
    
    
    1.99
    %
    
    
    165,469
    
    
    
    7.27
    %
    
    
    403,2042006
    
    
    
    
    
    
    
    
    
    
    6.55
    %
    
    
    2,937
    
    
    
    6.49
    %
    
    
    391,5852007
    
    
    
    
    
    
    
    
    
    
    4.99
    %
    
    
    373
    
    
    
    5.54
    %
    
    
    1,2562008
    
    
    
    
    
    
    
    
    
    
    5.19
    %
    
    
    5,269
    
    
    
    5.55
    %
    
    
    1,098Years thereafter
    
    
    
    
    
    
    
    
    
    
    1.84
    %
    
    
    106,520
    
    
    
    5.83
    %
    
    
    1,547,775Total
    
    
    
    
    
    $
    86,081
    
    
    
    
    
    
    $
    561,317
    
    
    
    
    
    
    $
    2,769,083Fair value
    
    
    
    
    
    $
    86,081
    
    
    
    
    
    
    $
    561,447
    
    
    
    
    
    
    $
    2,913,085
 The tables below present contractual balances of APS long-term debt at the expected maturity
dates as well as the fair value of those instruments on December 31, 2004 and 2003. The interest
rates presented in the tables below represent the weighted-average interest rates for the years
ended December 31, 2004 and 2003 (dollars in thousands): Variable-Rate
    
    
    Fixed-RateLong-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest2004
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2005
    
    
    1.22
    %
    
    $
    49,520
    
    
    
    7.27
    %
    
    $
    401,7272006
    
    
    
    
    
    
    
    
    
    
    6.72
    %
    
    
    86,0822007
    
    
    
    
    
    
    
    
    
    
    5.51
    %
    
    
    8672008
    
    
    
    
    
    
    
    
    
    
    5.51
    %
    
    
    1,0542009
    
    
    
    
    
    
    
    
    
    
    5.51
    %
    
    
    818Years thereafter
    
    
    1.31
    %
    
    
    516,340
    
    
    
    4.79
    %
    
    
    1,669,901Total
    
    
    
    
    
    $
    565,860
    
    
    
    
    
    
    $
    2,160,449Fair value
    
    
    
    
    
    $
    565,799
    
    
    
    
    
    
    $
    2,254,061
 Variable-Rate
    
    
    Fixed-RateLong-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest2003
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2004
    
    
    1.57
    %
    
    $
    280,340
    
    
    
    6.16
    %
    
    $
    206,7272005
    
    
    
    
    
    
    
    
    
    
    7.27
    %
    
    
    402,2592006
    
    
    
    
    
    
    
    
    
    
    6.73
    %
    
    
    85,4512007
    
    
    
    
    
    
    
    
    
    
    5.55
    %
    
    
    1,1342008
    
    
    
    
    
    
    
    
    
    
    5.55
    %
    
    
    1,098Years thereafter
    
    
    1.84
    %
    
    
    106,520
    
    
    
    5.83
    %
    
    
    1,547,775Total
    
    
    
    
    
    $
    386,860
    
    
    
    
    
    
    $
    2,244,444Fair value
    
    
    
    
    
    $
    386,906
    
    
    
    
    
    
    $
    2,365,821
 52




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##### Table of Contents



Commodity Price Risk We are exposed to the impact of market fluctuations in the commodity price and transportation
costs of electricity, natural gas, coal and emissions allowances. We manage risks associated with
these market fluctuations by utilizing various commodity instruments that qualify as derivatives,
including exchange-traded futures and options and over-the-counter forwards, options and swaps.
Our ERMC, consisting of officers and key management personnel, oversees company-wide energy risk
management activities and monitors the results of marketing and trading activities to ensure
compliance with our stated energy risk management and trading policies. As part of our risk
management program, we use such instruments to hedge purchases and sales of electricity, fuels and
emissions allowances and credits. The changes in market value of such contracts have a high
correlation to price changes in the hedged commodities. In addition, subject to specified risk
parameters monitored by the ERMC, we engage in marketing and trading activities intended to profit
from market price movements. The mark-to-market value of derivative instruments related to our risk management and trading
activities are presented in two categories consistent with our business segments:  
    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 segment. The following tables show the pretax changes in mark-to-market of our non-trading and trading
derivative positions in 2004 and 2003 (dollars in millions): 2004
    
    
    2003Regulated
    
    
    Marketing and
    
    
    Regulated
    
    
    Marketing andElectricity
    
    
    Trading
    
    
    Electricity
    
    
    TradingMark-to-market of net positions
at beginning of year
    
    $
    
    
    
    $
    69
    
    
    $
    (49
    )
    
    $
    57Change in mark-to-market
gains/(losses) for future
period deliveries
    
    
    11
    
    
    
    21
    
    
    
    (5
    )
    
    
    (7
    )Changes in cash flow hedges
recorded in OCI
    
    
    43
    
    
    
    37
    
    
    
    41
    
    
    
    44Ineffective portion of changes
in fair value recorded in
earnings
    
    
    (2
    )
    
    
    1
    
    
    
    8
    
    
    
    Mark-to-market losses/(gains)
realized during the year
    
    
    (18
    )
    
    
    (21
    )
    
    
    5
    
    
    
    (25
    )Mark-to-market of net positions
at end of year
    
    $
    34
    
    
    $
    107
    
    
    $
    
    
    
    $
    69
 53




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##### Table of Contents



The tables below show the fair value of maturities of our non-trading and trading derivative
contracts (dollars in millions) at December 31, 2004 by maturities and by the type of valuation
that is performed to calculate the fair values. See Note 1,
Derivative Accounting, for more
discussion of our valuation methods. Regulated Electricity TotalfairSource of Fair Value
    
    2005
    
    
    2006
    
    
    2007
    
    
    valuePrices actively quoted
    
    $
    27
    
    
    $
    10
    
    
    $
    (2
    )
    
    $
    35Prices provided by other external
sources
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Prices based on models and other
valuation methods
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Total by maturity
    
    $
    26
    
    
    $
    10
    
    
    $
    (2
    )
    
    $
    34
 Marketing and Trading TotalYears
    
    
    fairSource of Fair Value
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    thereafter
    
    
    valuePrices actively quoted
    
    $
    44
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    44Prices provided by
other external sources
    
    
    1
    
    
    
    32
    
    
    
    42
    
    
    
    24
    
    
    
    (1
    )
    
    
    (2
    )
    
    
    96Prices based on models
and other valuation
methods
    
    
    (9
    )
    
    
    (6
    )
    
    
    (13
    )
    
    
    (6
    )
    
    
    
    
    
    
    1
    
    
    
    (33
    )Total by maturity
    
    $
    36
    
    
    $
    26
    
    
    $
    29
    
    
    $
    18
    
    
    $
    (1
    )
    
    $
    (1
    )
    
    $
    107
 The table below shows the impact that hypothetical price movements of 10% would have on the
market value of our risk management and trading assets and liabilities included on Pinnacle Wests
Consolidated Balance Sheets at December 31, 2004 and 2003 (dollars in millions). December 31, 2004
    
    
    December 31, 2003Gain (Loss)
    
    
    Gain (Loss)Commodity
    
    Price Up
    
    
    Price Down
    
    
    Price Up
    
    
    Price Down10%
    
    
    10%
    
    
    10%
    
    
    10%Mark-to-market changes
reported in earnings (a):Electricity
    
    $
    (4
    )
    
    $
    4
    
    
    $
    (2
    )
    
    $
    2Natural gas
    
    
    2
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    1Other
    
    
    1
    
    
    
    (1
    )
    
    
    1
    
    
    
    Mark-to-market changes
reported in OCI (b):Electricity
    
    
    35
    
    
    
    (35
    )
    
    
    36
    
    
    
    (36
    )Natural gas
    
    
    43
    
    
    
    (43
    )
    
    
    30
    
    
    
    (30
    )Total
    
    $
    77
    
    
    $
    (77
    )
    
    $
    64
    
    
    $
    (63
    )
 54




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(a)
    
    These contracts are primarily structured sales activities hedged with a
portfolio of forward purchases that protects the economic value of the sales
transactions.(b)
    
    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 We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We
have risk management and trading contracts with many counterparties, including two counterparties
for which a worst case exposure represents approximately 35% of Pinnacle Wests $391 million of
risk management and trading assets as of December 31, 2004. See Note 1, Derivative
Accounting for a discussion of our credit valuation adjustment policy. See Note 18 for further
discussion of credit risk. ARIZONA PUBLIC SERVICE COMPANY  RESULTS OF OPERATIONS General Throughout the following explanations of APS results of operations, we refer to gross
margin. Gross margin refers to electric operating revenues less
purchased power and fuel costs.
Gross margin is a non-GAAP financial measure, as defined in accordance with SEC rules. Operating income (a GAAP financial measure) plus specified operating expenses (operations and maintenance,
depreciation and amortization, operating income taxes and other
taxes), as disclosed on the Statements of Income, is equal to gross margin. We view gross margin as an important performance measure of the core
profitability of our operations. This measure is a key component of our internal financial
reporting and is used by our management in analyzing our business segments. We believe that
investors benefit from having access to the same financial measures that our management uses. In
addition, we have reclassified certain prior period amounts to conform to our current period
presentation. 2004 Compared with 2003 APS net income for the year ended December 31, 2004 was $200 million compared with $181
million for the prior year. The $19 million increase in the period-to-period comparison reflects
lower regulatory asset amortization; the benefit of customer growth; decreased purchased power and
fuel costs primarily due to lower prices for capacity purchases; increased interest income and
lower replacement power costs due to fewer unplanned outages. These positive factors were
partially offset by increased operations and maintenance costs related to increased generation,
customer service and personnel costs; the effects of weather on retail sales; higher depreciation
and amortization related to increased delivery and other assets; lower realized margins on energy
trading due to higher wholesale electricity prices; a retail electricity price reduction; lower
income tax credits; and higher interest expense primarily due to increased utility plant in
service. 55




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Additional details on the major factors that increased (decreased) net income for the year
ended December 31, 2004 compared with the prior year are contained in the following table (dollars
in millions). Increase (Decrease)Pretax
    
    
    After TaxGross margin:Higher retail sales volumes due to customer growth, excluding
weather effects
    
    $
    43
    
    
    $
    26Decreased purchased power and fuel costs primarily due to lower
prices for capacity purchases
    
    
    30
    
    
    
    18Lower replacement power costs due to fewer unplanned outages
    
    
    6
    
    
    
    4Effects of weather on retail sales
    
    
    (17
    )
    
    
    (10
    )Lower margins on energy trading primarily due to higher wholesale
electricity prices
    
    
    (14
    )
    
    
    (9
    )Retail electricity price reduction effective July 1, 2003
    
    
    (13
    )
    
    
    (8
    )Miscellaneous factors, net
    
    
    (3
    )
    
    
    (2
    )Net increase in gross margin
    
    
    32
    
    
    
    19Higher operations and maintenance expense primarily related to increased
generation, customer service, and personnel costs
    
    
    (27
    )
    
    
    (16
    )Higher interest expense primarily due to increased utility plant in service
    
    
    (10
    )
    
    
    (6
    )Depreciation and amortization decreases (increases):Lower regulatory asset amortization
    
    
    68
    
    
    
    41Increased delivery and other assets
    
    
    (16
    )
    
    
    (10
    )Higher other income primarily due to increased interest income
    
    
    10
    
    
    
    6Lower income tax credits
    
    
    
    
    
    
    (11
    )Miscellaneous items, net
    
    
    (6
    )
    
    
    (4
    )Net increase in net income
    
    $
    51
    
    
    $
    19
 Regulated Electricity Revenues Regulated electricity revenues were $52 million higher in the year ended December 31, 2004
compared with the prior year, primarily as a result of:  
    an $101 million increase in retail revenues related to customer growth
and higher average usage, excluding weather effects;
    a $42 million decrease in retail revenues related to weather;
    a $13 million decrease in retail revenues related to a reduction in
retail electricity prices; and
    a $6 million increase due to miscellaneous factors. Marketing and Trading Revenues Marketing and trading revenues were $40 million higher in the year ended December 31, 2004
compared with the prior year, primarily as a result of: 56




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
    a $13 million decrease from generation sales other than Native Load due
to substantially lower sales volumes, resulting from lower market spark spreads;
    $49 million of higher energy trading revenues on realized sales of
electricity primarily due to higher electricity prices; and
    $4 million in higher mark-to-market gains for future-period deliveries
primarily as a result of higher forward prices for wholesale electricity. 2003 Compared with 2002 APS net income for the year ended December 31, 2003 was $181 million compared with $199
million for the prior year. The $18 million decrease in the period-to-period comparison reflects
higher purchased power and fuel costs resulting from higher prices for hedged gas and purchased
power; higher replacement power costs from plant outages due to higher market prices and more
unplanned outages (Cholla Unit 3 experienced an unplanned outage from August of 2003 through
November of 2003); higher operations and maintenance costs related to increased pension and other
benefits; two retail electricity price reductions; and higher depreciation expense related to
increased delivery and other assets. These negative factors were partially offset by higher retail
sales primarily due to customer growth and favorable weather; lower operating costs primarily
related to severance costs recorded in 2002; lower regulatory asset amortization; tax credits and
favorable income tax adjustments related to prior years resolved in 2003; higher income related to
APS return to the AFUDC method of capitalizing construction finance costs; and increased
generation sales other than Native Load primarily due to higher sales volumes, partially offset by
lower unit margins. 57




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Additional details on the major factors that increased (decreased) net income for the year
ended December 31, 2003 compared with the prior year are contained in the following table (dollars
in millions). Increase (Decrease)Pretax
    
    
    After TaxGross margin:Increased purchased power and fuel costs primarily due to higher
prices for hedged gas and purchased power
    
    $
    (74
    )
    
    $
    (45
    )Higher replacement power costs from plant outages due to higher market
prices and more unplanned outages
    
    
    (47
    )
    
    
    (28
    )Retail electricity price reductions effective July 1, 2002 and July 1,
2003
    
    
    (27
    )
    
    
    (16
    )Higher retail sales volumes due to customer growth, excluding weather
effects
    
    
    48
    
    
    
    29Effects of weather on retail sales
    
    
    13
    
    
    
    8Increase in generation sales other than Native Load primarily due to
higher sales volumes partially offset by lower unit margins
    
    
    10
    
    
    
    6Decreased purchased power costs due to new power plants in service
    
    
    8
    
    
    
    5Miscellaneous factors, net
    
    
    5
    
    
    
    2Net decrease in gross margin
    
    
    (64
    )
    
    
    (39
    )Operations and maintenance expense decreases (increases):Severance costs recorded in 2002
    
    
    34
    
    
    
    20Increased pension and other benefit costs
    
    
    (22
    )
    
    
    (13
    )Increased costs related to customer growth and increased payroll
    
    
    (15
    )
    
    
    (9
    )Increased payroll cost related to transfer of power marketing
division
    
    
    (13
    )
    
    
    (8
    )Net other items
    
    
    (2
    )
    
    
    (1
    )Higher interest expense due to higher debt balances
    
    
    (14
    )
    
    
    (8
    )Depreciation and amortization decreases (increases):Decreased regulatory asset amortization
    
    
    29
    
    
    
    18Increased delivery and other assets
    
    
    (19
    )
    
    
    (12
    )Our return to the AFUDC method of capitalizing construction finance costs
    
    
    8
    
    
    
    11Higher other income due to increased interest income and investment gains
    
    
    15
    
    
    
    9Miscellaneous items, net
    
    
    5
    
    
    
    3Tax credits and favorable income tax adjustments related to prior years
resolved in 2003
    
    
    
    
    
    
    11Net decrease in net income
    
    $
    (58
    )
    
    $
    (18
    )
 Regulated Electricity Revenues Regulated electricity revenues were $97 million higher in the year ended December 31, 2003
compared with the prior year, primarily as a result of:  
    an $85 million increase in retail revenues related to customer growth
and higher average usage, excluding weather effects;
    a $21 million increase in retail revenues related to weather;
    a $6 million increase related to traditional wholesale sales as a result
of higher prices and higher sales volumes; 58




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
    a $27 million decrease in retail revenues related to two reductions in
retail electricity prices; and
    a $12 million net increase due to miscellaneous factors. Marketing and Trading Revenues Marketing and trading revenues were $71 million higher in the year ended December 31, 2003
compared with the prior year, primarily as a result of:  
    a $66 million increase from generation sales other than Native Load
primarily due to higher prices and sales volumes, including sales from new power plants
in service;
    a $5 million net increase due to miscellaneous factors. LIQUIDITY AND CAPITAL RESOURCES  ARIZONA PUBLIC SERVICE COMPANY Contractual Obligations The following table summarizes contractual requirements for APS as of December 31, 2004
(dollars in millions): 2006-
    
    
    2008-
    
    
    There-2005
    
    
    2007
    
    
    2009
    
    
    after
    
    
    TotalLong-term debt payments,
including interest (a)
    
    $
    577
    
    
    $
    503
    
    
    $
    206
    
    
    $
    2,746
    
    
    $
    4,032Capital lease payments
    
    
    2
    
    
    
    3
    
    
    
    2
    
    
    
    3
    
    
    
    10Operating lease payments
    
    
    65
    
    
    
    127
    
    
    
    122
    
    
    
    352
    
    
    
    666Purchase power and fuel
commitments (b)
    
    
    245
    
    
    
    206
    
    
    
    134
    
    
    
    363
    
    
    
    948Minimum pension funding
requirement (c)
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Purchase obligations (d)
    
    
    263
    
    
    
    15
    
    
    
    
    
    
    
    68
    
    
    
    346Nuclear decommissioning
funding requirements
    
    
    11
    
    
    
    22
    
    
    
    22
    
    
    
    146
    
    
    
    201Total contractual
commitments
    
    $
    1,209
    
    
    $
    876
    
    
    $
    486
    
    
    $
    3,678
    
    
    $
    6,249
   (a)
    
    The long-term debt matures at various dates through 2034 and bears interest principally at
fixed rates. Interest on variable-rate long-term debt is determined by the rates at December
31, 2004.(b)
    
    APS purchase power and fuel commitments include purchases of coal, electricity, natural gas,
and nuclear fuel (see Note S-5).(c)
    
    Future pension contributions are not determinable for time periods after 2005.(d)
    
    These contractual obligations include commitments for capital expenditures and other
obligations. Obligations for 2005 include about $190 million for acquisition of the Sundance
Plant (see Note 3). 59




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##### Table of Contents



RISK FACTORS Exhibit 99.31
and Exhibit 99.32, which are hereby incorporated by reference, contain a
discussion of risk factors affecting Pinnacle West and APS, respectively. FORWARD-LOOKING STATEMENTS This document contains forward-looking statements based on current expectations, and neither
Pinnacle West nor APS assumes any obligation to update these statements or make any further
statements on any of these issues, except as required by applicable law. These forward-looking
statements are often identified by words such as estimate, predict, hope, may, believe,
anticipate, plan, expect, require, intend, assume and similar words. Because actual
results may differ materially from expectations, we caution readers not to place undue reliance on
these statements. A number of factors could cause future results to differ materially from
historical results, or from results or outcomes currently expected or sought by Pinnacle West or
APS. In addition to the Risk Factors described in
Exhibits 99.31 and 99.32 to this report, these
factors include, but are not limited to:  
    state and federal regulatory and legislative decisions and actions, including the
outcome of the rate case APS filed with the ACC on June 27, 2003 and the wholesale
electric price mitigation plan adopted by the FERC;
    the outcome of regulatory, legislative and judicial proceedings relating to the
restructuring;
    the ongoing restructuring of the electric industry, including the introduction of
retail electric competition in Arizona and decisions impacting wholesale competition;
    market prices for electricity and natural gas;
    power plant performance and outages, including 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 purchased
power and fuel costs and the completion of generation and transmission 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;
    the uncertainty that current credit ratings will remain 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 amount of required contributions to Pinnacle Wests pension plan 60




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and 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. 61




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ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK See
Pinnacle West Consolidated  Factors Affecting Our
Financial Outlook in Item 7 above for a
discussion of quantitative and qualitative disclosures about market risk. 62




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE PageManagements
Report on Internal Control Over Financial Reporting (Pinnacle West
Capital Corporation)
    
    64Report of Independent Registered Public Accounting Firm
    
    65Pinnacle West Consolidated Statements of Income for 2004, 2003 and 2002
    
    67Pinnacle West Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    68Pinnacle West Consolidated Statements of Cash Flows for 2004, 2003 and 2002
    
    70Pinnacle West Consolidated Statements of Changes in Common Stock Equity
for 2004, 2003 and 2002
    
    71Notes to Pinnacle Wests Consolidated Financial Statements
    
    72Managements
Report on Internal Control Over Financial Reporting (Arizona Public
Service Company)
    
    128Report
of Independent Registered Public Accounting Firm
    
    129APS Statements of Income for 2004, 2003 and 2002
    
    131APS Balance Sheets as of December 31, 2004 and 2003
    
    132APS Statements of Cash Flow for 2004, 2003 and 2002
    
    134APS Statements of Changes in Common Stock Equity for 2004, 2003 and 2002
    
    135Supplemental Notes to APS Financial Statements
    
    137Financial Statement Schedule for 2004, 2003 and 2002Pinnacle West Schedule II  Valuation and Qualifying Accounts for 2004, 2003
and 2002
    
    146APS Schedule II 
Reserve for Uncollectibles for 2004, 2003
and 2002
    
    147
 See Note 13 for the selected quarterly financial data required to be presented in this Item. 63




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING(PINNACLE WEST CAPITAL CORPORATION) Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13(a)-15(f). Management conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control  Integrated Framework,our management concluded that our internal control over financial
reporting was effective as of December 31, 2004. Our managements assessment of the effectiveness
of our internal control over financial reporting as of December 31, 2004 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report
which is included herein and relates also to the Companys consolidated financial statements. March 15, 2005 64




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
Pinnacle West Capital Corporation
Phoenix, Arizona We have audited the accompanying consolidated balance sheets of Pinnacle West Capital Corporation
and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated
statements of income, changes in common stock equity, and cash flows for each of the three years in
the period ended December 31, 2004. Our audits also included the financial statement schedule
listed in the Index at Item 15. We also have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over Financial Reporting, that the Company
maintained effective internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on these financial statements and
financial statement schedule, an opinion on managements assessment, and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements. 65




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Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2004 and 2003, and the
results of its operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. Also, in our opinion, managements assessment that
the Company maintained effective internal control over financial reporting as of December 31, 2004,
is fairly stated, in all material respects, based on the criteria
established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004, based on the criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As discussed in Note 18 to the consolidated financial statements, in 2002 the Company changed its
method for accounting for trading activities in order to comply with the provisions of Emerging
Issues Task Force Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for
Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities. DELOITTE & TOUCHE LLP
Phoenix, Arizona March 15, 2005 66




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(dollars and shares in thousands, except per share amounts) Year Ended December 31,2004
    
    
    2003
    
    
    2002OPERATING REVENUESRegulated electricity segment
    
    $
    2,035,247
    
    
    $
    1,978,075
    
    
    $
    1,890,391Marketing and trading segment
    
    
    461,870
    
    
    
    391,886
    
    
    
    286,879Real estate segment
    
    
    359,792
    
    
    
    361,604
    
    
    
    201,081Other revenues
    
    
    42,816
    
    
    
    27,929
    
    
    
    26,899Total
    
    
    2,899,725
    
    
    
    2,759,494
    
    
    
    2,405,250OPERATING EXPENSESRegulated electricity segment purchased
power and fuel
    
    
    567,433
    
    
    
    517,320
    
    
    
    376,911Marketing and trading segment purchased
power and fuel
    
    
    382,147
    
    
    
    344,862
    
    
    
    154,987Operations and maintenance
    
    
    596,557
    
    
    
    548,732
    
    
    
    584,538Real estate operations segment
    
    
    289,900
    
    
    
    305,974
    
    
    
    185,925Depreciation and amortization
    
    
    401,105
    
    
    
    435,140
    
    
    
    422,299Taxes other than income taxes
    
    
    122,216
    
    
    
    110,270
    
    
    
    107,952Other expenses
    
    
    34,108
    
    
    
    23,254
    
    
    
    21,895Total
    
    
    2,393,466
    
    
    
    2,285,552
    
    
    
    1,854,507OPERATING INCOME
    
    
    506,259
    
    
    
    473,942
    
    
    
    550,743OTHERAllowance for equity funds used during
construction
    
    
    4,885
    
    
    
    14,240
    
    
    
    Other income (Note 19)
    
    
    53,989
    
    
    
    35,563
    
    
    
    14,910Other expenses (Note 19)
    
    
    (21,510
    )
    
    
    (20,574
    )
    
    
    (33,655
    )Total
    
    
    37,364
    
    
    
    29,229
    
    
    
    (18,745
    )INTEREST EXPENSEInterest charges
    
    
    195,859
    
    
    
    204,339
    
    
    
    187,039Capitalized interest
    
    
    (16,311
    )
    
    
    (29,444
    )
    
    
    (43,749
    )Total
    
    
    179,548
    
    
    
    174,895
    
    
    
    143,290INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    364,075
    
    
    
    328,276
    
    
    
    388,708INCOME TAXES
    
    
    128,857
    
    
    
    102,473
    
    
    
    152,145INCOME FROM CONTINUING OPERATIONS
    
    
    235,218
    
    
    
    225,803
    
    
    
    236,563Income (loss) from discontinued operations  net
of income tax expense (benefit)
of $5,480, $9,616, and ($14,045)
    
    
    7,977
    
    
    
    14,776
    
    
    
    (21,410
    )Cumulative effect of a change in
accounting for trading activities 
net of income tax benefit of ($43,123)
    
    
    
    
    
    
    
    
    
    
    (65,745
    )NET INCOME
    
    $
    243,195
    
    
    $
    240,579
    
    
    $
    149,408WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING  BASIC
    
    
    91,397
    
    
    
    91,265
    
    
    
    84,903WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING  DILUTED
    
    
    91,532
    
    
    
    91,405
    
    
    
    84,964EARNINGS PER WEIGHTED  AVERAGE
COMMON SHARE OUTSTANDINGIncome from continuing operations  basic
    
    $
    2.57
    
    
    $
    2.47
    
    
    $
    2.79Net income  basic
    
    
    2.66
    
    
    
    2.64
    
    
    
    1.76Income from continuing operations  diluted
    
    
    2.57
    
    
    
    2.47
    
    
    
    2.78Net income  diluted
    
    
    2.66
    
    
    
    2.63
    
    
    
    1.76DIVIDENDS DECLARED PER SHARE
    
    $
    1.825
    
    
    $
    1.725
    
    
    $
    1.625
 See Notes to Pinnacle Wests Consolidated Financial Statements. 67




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) December 31,2004
    
    
    2003ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    163,366
    
    
    $
    131,062Investment in debt securities
    
    
    181,175
    
    
    
    91,850Customer and other receivables
    
    
    367,863
    
    
    
    354,666Allowance for doubtful accounts
    
    
    (4,896
    )
    
    
    (9,223
    )Accrued utility revenues
    
    
    93,227
    
    
    
    88,629Materials and supplies (at average cost)
    
    
    101,333
    
    
    
    96,099Fossil fuel (at average cost)
    
    
    20,512
    
    
    
    28,367Assets from risk management and trading activities
(Note 18)
    
    
    166,896
    
    
    
    97,630Assets related to discontinued operations (Note 22)
    
    
    
    
    
    
    23,065Other current assets
    
    
    47,654
    
    
    
    72,649Total current assets
    
    
    1,137,130
    
    
    
    974,794INVESTMENTS AND OTHER ASSETSReal estate investments  net (Notes 1 and 6)
    
    
    382,398
    
    
    
    358,441Assets from risk management and trading
activities- long term (Note 18)
    
    
    224,341
    
    
    
    138,946Decommissioning trust accounts (Note 12)
    
    
    267,700
    
    
    
    240,645Other assets
    
    
    107,212
    
    
    
    88,473Total investments and other assets
    
    
    981,651
    
    
    
    826,505PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6,
9 and 10)Plant in service and held for future use
    
    
    10,486,648
    
    
    
    9,904,874Less accumulated depreciation and amortization
    
    
    3,365,954
    
    
    
    3,145,609Total
    
    
    7,120,694
    
    
    
    6,759,265Construction work in progress
    
    
    258,119
    
    
    
    554,876Intangible
assets, net of accumulated amortization of $158,584 and $128,126
    
    
    105,486
    
    
    
    108,534Nuclear fuel, net of accumulated amortization of
$59,020 and $58,053
    
    
    51,188
    
    
    
    52,011Net property, plant and equipment
    
    
    7,535,487
    
    
    
    7,474,686DEFERRED
DEBITS
Regulatory assets (Notes 1, 3 and 4)
    
    
    135,051
    
    
    
    132,349Other deferred debits
    
    
    107,428
    
    
    
    110,708Total deferred debits
    
    
    242,479
    
    
    
    243,057TOTAL ASSETS
    
    $
    9,896,747
    
    
    $
    9,519,042
 See Notes to Pinnacle Wests Consolidated Financial Statements. 68




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) December 31,2004
    
    
    2003LIABILITIES AND EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    373,526
    
    
    $
    283,021Accrued taxes
    
    
    245,611
    
    
    
    69,769Accrued interest
    
    
    38,795
    
    
    
    51,825Short-term borrowings (Note 5)
    
    
    71,030
    
    
    
    86,081Current maturities of long-term debt (Note 6)
    
    
    617,165
    
    
    
    704,914Customer deposits
    
    
    55,558
    
    
    
    49,783Deferred income taxes (Note 4)
    
    
    9,057
    
    
    
    631Liabilities from risk management and trading
activities (Note 18)
    
    
    113,406
    
    
    
    92,755Liabilities related to discontinued operations (Note 22)
    
    
    
    
    
    
    16,427Other current liabilities
    
    
    101,748
    
    
    
    77,362Total current liabilities
    
    
    1,625,896
    
    
    
    1,432,568LONG-TERM DEBT LESS CURRENT MATURITIES
(Note 6)
    
    
    2,584,985
    
    
    
    2,616,585DEFERRED CREDITS AND OTHERDeferred income taxes (Note 4)
    
    
    1,227,553
    
    
    
    1,338,527Regulatory liabilities (Notes 1, 3 and 4)
    
    
    506,646
    
    
    
    468,694Liability for asset retirements (Note 12)
    
    
    251,612
    
    
    
    234,440Pension liability (Note 8)
    
    
    234,445
    
    
    
    188,041Liabilities from risk management and trading
activities-long term (Note 18)
    
    
    156,262
    
    
    
    82,730Unamortized gain  sale of utility plant (Note 9)
    
    
    50,333
    
    
    
    54,909Other
    
    
    308,819
    
    
    
    272,769Total deferred credits and other
    
    
    2,735,670
    
    
    
    2,640,110COMMITMENTS AND CONTINGENCIES (Notes 3, 11
and 12)COMMON STOCK EQUITY (Note 7)Common stock, no par value; authorized
150,000,000 shares; issued 91,802,861 at end of
2004
and 91,379,947 at end of 2003
    
    
    1,769,047
    
    
    
    1,744,354Treasury stock at cost; 9,522 shares at end of 2004 and
92,015 shares at end of 2003
    
    
    (428
    )
    
    
    (3,273
    )Total common stock
    
    
    1,768,619
    
    
    
    1,741,081Accumulated other comprehensive income (loss):Minimum pension liability adjustment
    
    
    (81,788
    )
    
    
    (66,564
    )Derivative instruments
    
    
    59,243
    
    
    
    27,563Total accumulated other comprehensive loss
    
    
    (22,545
    )
    
    
    (39,001
    )Retained earnings
    
    
    1,204,122
    
    
    
    1,127,699Total common stock equity
    
    
    2,950,196
    
    
    
    2,829,779TOTAL LIABILITIES AND EQUITY
    
    $
    9,896,747
    
    
    $
    9,519,042
 See Notes to Pinnacle Wests Consolidated Financial Statements. 69




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands) Year Ended December 31,2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIESNet Income
    
    $
    243,195
    
    
    $
    240,579
    
    
    $
    149,408Adjustment to reconcile net income to net cash provided by
operating activities:Loss (income) from discontinued operations, net of tax
    
    
    (7,977
    )
    
    
    (14,776
    )
    
    
    21,410Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    
    
    
    
    65,745Equity earnings in Phoenix Suns partnership
    
    
    (34,594
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    401,105
    
    
    
    435,140
    
    
    
    422,299Nuclear fuel amortization
    
    
    30,446
    
    
    
    28,757
    
    
    
    31,185Allowance for equity funds used during construction
    
    
    (4,885
    )
    
    
    (14,240
    )
    
    
    Deferred income taxes
    
    
    (113,850
    )
    
    
    81,756
    
    
    
    191,135Change in mark-to-market valuations
    
    
    (18,915
    )
    
    
    17,410
    
    
    
    (18,146
    )Redhawk Units 3 and 4 cancellation charge
    
    
    
    
    
    
    
    
    
    
    49,192Changes in current assets and liabilities:Customer and other receivables
    
    
    (17,524
    )
    
    
    (12,456
    )
    
    
    60,336Accrued utility revenues
    
    
    (4,598
    )
    
    
    5,875
    
    
    
    (18,373
    )Materials, supplies and fossil fuel
    
    
    2,621
    
    
    
    (4,629
    )
    
    
    (11,599
    )Other current assets
    
    
    24,995
    
    
    
    (6,865
    )
    
    
    (6,643
    )Accounts payable
    
    
    98,001
    
    
    
    (7,125
    )
    
    
    17,008Accrued taxes
    
    
    175,842
    
    
    
    (1,338
    )
    
    
    (36,041
    )Accrued interest
    
    
    (13,030
    )
    
    
    (1,193
    )
    
    
    4,212Other current liabilities
    
    
    33,669
    
    
    
    8,668
    
    
    
    24,755Proceeds from the sale of real estate assets
    
    
    80,035
    
    
    
    130,597
    
    
    
    47,906Real estate investments
    
    
    (62,812
    )
    
    
    (51,837
    )
    
    
    (56,355
    )Increase in regulatory assets
    
    
    (2,702
    )
    
    
    (20,971
    )
    
    
    (11,029
    )Change in risk management and trading  assets
    
    
    (2,549
    )
    
    
    46,911
    
    
    
    (11,700
    )Change in risk management and trading  liabilities
    
    
    13,018
    
    
    
    (11,613
    )
    
    
    (22,783
    )Change in customer advances
    
    
    6,402
    
    
    
    7,270
    
    
    
    (23,780
    )Change in pension liability
    
    
    23,822
    
    
    
    19,074
    
    
    
    (3,009
    )Change in other long-term assets
    
    
    (39,710
    )
    
    
    13,124
    
    
    
    (13,593
    )Change in other long-term liabilities
    
    
    32,075
    
    
    
    12,635
    
    
    
    9,785Net cash flow provided by operating activities
    
    
    842,080
    
    
    
    900,753
    
    
    
    861,325CASH FLOWS
FROM INVESTING ACTIVITIES
Capital expenditures
    
    
    (538,232
    )
    
    
    (713,256
    )
    
    
    (909,259
    )Proceeds from sale of Silverhawk
    
    
    90,967
    
    
    
    
    
    
    
    Capitalized interest
    
    
    (16,311
    )
    
    
    (29,444
    )
    
    
    (43,749
    )Discontinued operations  Real Estate
    
    
    8,927
    
    
    
    27,193
    
    
    
    28,917Discontinued operations  NAC
    
    
    8,499
    
    
    
    (19,971
    )
    
    
    (12,259
    )Proceeds from the sale of the Phoenix Suns partnership
    
    
    23,101
    
    
    
    
    
    
    
    Purchases of investment securities
    
    
    (1,040,955
    )
    
    
    (877,660
    )
    
    
    Proceeds from sale of investment securities
    
    
    951,630
    
    
    
    785,810
    
    
    
    Proceeds from commercial real estate properties
    
    
    
    
    
    
    33,297
    
    
    
    9,272Other
    
    
    (19,579
    )
    
    
    (21,040
    )
    
    
    36,635Net cash flow used for investing activities
    
    
    (531,953
    )
    
    
    (815,071
    )
    
    
    (890,443
    )CASH FLOWS
FROM FINANCING ACTIVITIES
Issuance of long-term debt
    
    
    478,328
    
    
    
    656,850
    
    
    
    674,919Short-term borrowings and payments  net
    
    
    (15,051
    )
    
    
    (173,303
    )
    
    
    (306,079
    )Dividends paid on common stock
    
    
    (166,772
    )
    
    
    (157,417
    )
    
    
    (137,721
    )Repayment of long-term debt
    
    
    (604,015
    )
    
    
    (366,497
    )
    
    
    (354,916
    )Common stock equity issuance
    
    
    18,291
    
    
    
    
    
    
    
    199,238Other
    
    
    11,396
    
    
    
    8,181
    
    
    
    2,624Net cash flow (used for) provided by financing activities
    
    
    (277,823
    )
    
    
    (32,186
    )
    
    
    78,065NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    32,304
    
    
    
    53,496
    
    
    
    48,947CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
    
    
    131,062
    
    
    
    77,566
    
    
    
    28,619CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    163,366
    
    
    $
    131,062
    
    
    $
    77,566Supplemental disclosure of cash flow information
Cash paid during the period for:Income taxes paid/(refunded)
    
    $
    66,447
    
    
    $
    32,816
    
    
    $
    (17,918
    )Interest paid, net of amounts capitalized
    
    $
    191,865
    
    
    $
    161,581
    
    
    $
    126,322
 See Notes to Pinnacle Wests Consolidated Financial Statements. 70




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands) Year Ended December 31,2004
    
    
    2003
    
    
    2002COMMON STOCK
(Note 7)
Balance at beginning of year
    
    $
    1,744,354
    
    
    $
    1,737,258
    
    
    $
    1,536,924Issuance of common stock
    
    
    18,291
    
    
    
    
    
    
    
    199,238Other
    
    
    6,402
    
    
    
    7,096
    
    
    
    1,096Balance at end of year
    
    
    1,769,047
    
    
    
    1,744,354
    
    
    
    1,737,258TREASURY STOCK (Note 7)Balance at beginning of year
    
    
    (3,273
    )
    
    
    (4,358
    )
    
    
    (5,886
    )Purchase of treasury stock
    
    
    (2,986
    )
    
    
    
    
    
    
    (5,971
    )Reissuance of treasury stock used for stock
compensation, net
    
    
    5,831
    
    
    
    1,085
    
    
    
    7,499Balance at end of year
    
    
    (428
    )
    
    
    (3,273
    )
    
    
    (4,358
    )RETAINED EARNINGSBalance at beginning of year
    
    
    1,127,699
    
    
    
    1,044,537
    
    
    
    1,032,850Net income
    
    
    243,195
    
    
    
    240,579
    
    
    
    149,408Common stock dividends
    
    
    (166,772
    )
    
    
    (157,417
    )
    
    
    (137,721
    )Balance at end of year
    
    
    1,204,122
    
    
    
    1,127,699
    
    
    
    1,044,537ACCUMULATED OTHER
COMPREHENSIVE INCOME/(LOSS)Balance at beginning of year
    
    
    (39,001
    )
    
    
    (91,284
    )
    
    
    (64,565
    )Minimum pension liability adjustment, net of
tax expense (benefit) of ($9,756),
$3,700 and ($46,109)
    
    
    (15,224
    )
    
    
    4,700
    
    
    
    (70,298
    )Unrealized gain on derivative instruments,
net of tax expense of $31,117,
$33,298 and $28,820
    
    
    48,226
    
    
    
    51,089
    
    
    
    43,939Reclassification of realized gain to
income, net of tax benefit of ($10,695),
($2,343) and ($237)
    
    
    (16,546
    )
    
    
    (3,506
    )
    
    
    (360
    )Balance at end of year
    
    
    (22,545
    )
    
    
    (39,001
    )
    
    
    (91,284
    )TOTAL COMMON STOCK EQUITY
    
    $
    2,950,196
    
    
    $
    2,829,779
    
    
    $
    2,686,153COMPREHENSIVE
INCOME (LOSS)
Net income
    
    $
    243,195
    
    
    $
    240,579
    
    
    $
    149,408Other comprehensive income (loss)
    
    
    16,456
    
    
    
    52,283
    
    
    
    (26,719
    )Comprehensive income
    
    $
    259,651
    
    
    $
    292,862
    
    
    $
    122,689
 See Notes to Pinnacle Wests Consolidated Financial Statements. 71




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Consolidation and Nature of Operations Pinnacle Wests Consolidated Financial Statements include the accounts of Pinnacle West and
our subsidiaries: APS, Pinnacle West Energy, APS Energy Services, SunCor and El Dorado (principally
NAC). See Note 22 for a discussion of the sale of NAC in November 2004. Significant intercompany
accounts and transactions between the consolidated companies have been eliminated. APS is a vertically-integrated electric utility that provides either retail or wholesale
electric service to substantially all of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave county in northwestern Arizona. Through its marketing and trading division, APS also generates,
sells and delivers electricity to wholesale customers in the western United States. Pinnacle West
Energy, which was formed in 1999, is the subsidiary through which we conduct our unregulated
generation operations. APS Energy Services was formed in 1998 and provides competitive commodity
energy and energy-related products to key customers in competitive markets in the western United
States. SunCor is a developer of residential, commercial and industrial real estate projects in
Arizona, New Mexico, Idaho and Utah. El Dorado is an investment firm. Accounting Records and Use of Estimates Our accounting records are maintained in accordance with accounting principles generally
accepted in the United States of America (GAAP). The preparation of financial statements in
accordance with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. We have reclassified certain prior year amounts
to conform to the current year presentation. Derivative Accounting We are exposed to the impact of market fluctuations in the commodity price and transportation
costs of electricity, natural gas, coal and emissions allowances and in interest rates. We manage
risks associated with these market fluctuations by utilizing various instruments that
qualify as derivatives, including exchange-traded futures and options and over-the-counter
forwards, options and swaps. As part of our overall risk management program, we use such
instruments to hedge purchases and sales of electricity, fuels, and emissions allowances and
credits. In addition, subject to specified risk parameters monitored by the ERMC, we engage in
marketing and trading activities intended to profit from market price movements. We account for our derivative contracts in accordance with SFAS No. 133, as amended by SFAS
No. 149, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires
that entities recognize all derivatives as either assets or liabilities on the balance sheet and
measure those instruments at fair value. Changes in the fair value of derivative instruments are
either recognized periodically in income or, if certain hedge criteria are met, in common stock
equity (as a component of other comprehensive income (loss)). SFAS No. 133 provides a scope
exception for contracts that meet the normal purchases and sales criteria specified in the
standard. 72




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Prior to the fourth quarter of 2002, we accounted for our trading activity at fair value, with
changes in fair value reported in earnings as required by EITF 98-10, Accounting for Contracts
Involved in Energy Trading and Risk Management Activities. In the fourth quarter of 2002, we
adopted EITF 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management Activities, which rescinded
EITF 98-10. We recorded a $66 million after-tax charge in net income as a cumulative effect
adjustment for the previously recorded accumulated unrealized mark-to-market on energy trading
contracts that did not meet the accounting definition of a derivative. Our energy trading
contracts that are derivatives are accounted for at fair value under SFAS No. 133, as amended.
Energy trading contracts that do not meet the definition of a derivative are now accounted for on
an accrual basis with the associated revenues and costs recorded at the time the contracted
commodities are delivered or received. Under fair value (mark-to-market) accounting, derivative contracts for the purchase or sale of
energy commodities are reflected at fair market value, net of valuation adjustments, with resulting
unrealized gains and losses recorded as current or long-term assets and liabilities from risk
management and trading activities on the Consolidated Balance Sheets. We determine fair market value using actively-quoted prices when available. We consider
quotes for exchange-traded contracts and over-the-counter quotes obtained from independent brokers
to be actively-quoted. When actively-quoted prices are not available, we use prices provided by other external
sources. This includes quarterly and calendar year quotes from independent brokers, which we
convert into monthly prices using historical relationships. For options, long-term contracts and other contracts for which price quotes are not available,
we use models and other valuation methods. The valuation models we employ utilize spot prices,
forward prices, historical market data and other factors to forecast future prices. The primary
valuation technique we use to calculate the fair value of contracts where price quotes are not
available is based on the extrapolation of forward pricing curves using observable market data for
more liquid delivery points in the same region and actual transactions at the more illiquid
delivery points. We also value option contracts using a variation of the Black-Scholes
option-pricing model. For non-exchange traded contracts, we calculate fair market value based on the average of the
bid and offer price, and we discount to reflect net present value. We maintain certain valuation
adjustments for a number of risks associated with the valuation of future commitments. These
include valuation adjustments for liquidity and credit risks based on the financial condition of
counterparties. The liquidity valuation adjustment represents the cost that would be incurred if
all unmatched positions were closed-out or hedged. The credit valuation adjustment represents estimated credit losses on our overall exposure to
counterparties, taking into account netting arrangements, expected default experience for the
credit rating of the counterparties and the overall diversification of the portfolio.
Counterparties in the portfolio consist principally of major energy companies, municipalities,
local distribution companies and financial institutions. We maintain credit policies that
management believes minimize overall credit risk. Determination of the credit quality of
counterparties is based upon a number of factors, including credit ratings, financial condition,
project economics and collateral requirements. When 73




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS applicable, we employ standardized agreements that allow for the netting of positive and
negative exposures associated with a single counterparty. The use of models and other valuation methods to determine fair market value often requires
subjective and complex judgment. Actual results could differ from the results estimated through
application of these methods. Our marketing and trading portfolio includes structured activities
hedged with a portfolio of forward purchases that protects the economic value of the sales
transactions. Our practice is to hedge within timeframes established by the ERMC. See Note 18 for additional information about our derivative and energy trading accounting
policies. Regulatory Accounting APS is regulated by the ACC and the FERC. The accompanying financial statements reflect the
rate-making policies of these commissions. For regulated operations, we prepare our financial
statements in accordance with SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation. SFAS No. 71 requires a cost-based, rate-regulated enterprise to reflect the impact of
regulatory decisions in its financial statements. As a result, we capitalize certain costs that
would be included as expense in the current period by unregulated companies. Regulatory assets
represent incurred costs that have been deferred because they are probable of future recovery in
customer rates. Regulatory liabilities generally represent expected future costs that have already
been collected from customers. Management continually assesses whether our regulatory assets are probable of future recovery
by considering factors such as applicable regulatory environment changes and recent rate orders to
other regulated entities in the same jurisdiction. This determination reflects the current
political and regulatory climate in the state and is subject to change in the future. If future
recovery of costs ceases to be probable, the assets would be written off as a charge in current
period earnings. As part of the 1999 Settlement Agreement, APS amortized certain regulatory assets over a
period that ended June 30, 2004. Amortization in the last three years is as follows (dollars in
millions): 2002
    
    2003
    
    
    2004$115
    
    $
    86
    
    
    $
    18
 The detail of regulatory assets is as follows (dollars in millions): 74




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31,2004
    
    
    2003Electric industry restructuring transition costs (Note 3)
    
    $
    50
    
    
    $
    46Deferred compensation
    
    
    24
    
    
    
    24Loss on reacquired debt (a)
    
    
    17
    
    
    
    12Capital contributions on the Mead-Phoenix transmission
line
    
    
    13
    
    
    
    11Regulatory asset for deferred income taxes
    
    
    12
    
    
    
    9Spent nuclear fuel storage (Note 11)
    
    
    11
    
    
    
    7Balance recoverable under the 1999 Settlement
Agreement
    
    
    
    
    
    
    18Other
    
    
    8
    
    
    
    5Total regulatory assets
    
    $
    135
    
    
    $
    132
   (a)
    
    See Reacquired Debt Costs below. The detail of regulatory liabilities is as follows (dollars in millions): December 31,2004
    
    
    2003Removal costs (a)
    
    $
    462
    
    
    $
    439Deferred gains on utility property
    
    
    20
    
    
    
    20Deferred interest income (b)
    
    
    22
    
    
    
    8Other
    
    
    3
    
    
    
    2Total regulatory liabilities
    
    $
    507
    
    
    $
    469
   (a)
    
    See Note 12 for information on Asset Retirement Obligations.(b)
    
    See ACC Financing Orders in Note 3 for information on the APS Loan. Utility Plant and Depreciation Utility plant is the term we use to describe the business property and equipment that supports
electric service, consisting primarily of generation, transmission and distribution facilities. We
report utility plant at its original cost, which includes:  
    material and labor;
    contractor costs;
    capitalized leases;
    construction overhead costs (where applicable); and
    capitalized interest or an allowance for funds used during construction. We expense the costs of plant outages, major maintenance and routine maintenance as incurred.
We charge retired utility plant to accumulated depreciation. Prior to 2003, we charged removal
costs, less salvage, to accumulated depreciation. Effective January 1, 2003, we applied the
provisions of SFAS No. 143. The standard requires that liabilities associated with the retirement
of tangible long-lived assets be recognized at fair value as incurred and capitalized as part of
the related tangible long-lived assets. Accretion of the liability due to the passage of time is
an operating 75




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS expense and the capitalized cost is depreciated over the useful life of the long-lived asset.
See Note 12. APS records a regulatory liability for the asset retirement obligations related to its
regulated assets. This regulatory liability represents the difference between the amount that has
been recovered in regulated rates and the amount calculated under SFAS No. 143. APS believes it
can recover in regulated rates the transition and ongoing current period costs calculated in
accordance with SFAS No. 143. We record depreciation on utility plant on a straight-line basis over the remaining useful
life of the related assets. The approximate remaining average useful lives of our utility property
at December 31, 2004 were as follows:  
    Fossil plant  23 years;
    Nuclear plant  18 years;
    Other generation  26 years;
    Transmission  36 years;
    Distribution  23 years; and
    Other  8 years. For the years 2002 through 2004, the depreciation rates, as prescribed by our regulators,
ranged from a low of 1.51% to a high of 12.5%. The weighted-average rate was 3.36% for 2004, 3.35%
for 2003 and 3.35% for 2002. We depreciate non-utility property and equipment over the estimated
useful lives of the related assets, ranging from 3 to 55 years. Investments El Dorado accounts for its investments using the equity (if significant influence) and cost
(less than 20% ownership) methods. See Note 22 for a discussion of the sale of NAC. The Companys investments have been reviewed in accordance with EITF 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments, and no
other-than-temporary impairments were identified. Capitalized Interest Capitalized interest represents the cost of debt funds used to finance non-regulated
construction projects. Plant construction costs, including capitalized interest, are expensed
through depreciation when completed projects are placed into commercial operation. The rate used
to calculate capitalized interest was a composite rate of 4.44% for 2004, 4.55% for 2003 and 4.80%
for 2002. Capitalized interest ceases to accrue when construction is complete. Allowance for Funds Used During Construction AFUDC represents the approximate net composite interest cost of borrowed funds and a
reasonable return on the equity funds used for construction of regulated utility plant. Plant
construction costs, including AFUDC, are recovered in authorized rates through depreciation when
completed projects are placed into commercial operation. 76




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AFUDC was calculated by using a composite rate of 8.42% for 2004 and 8.55% for 2003. APS
compounds AFUDC monthly and ceases to accrue AFUDC when construction work is completed and the
property is placed in service. In 2003, APS returned to the AFUDC method of capitalizing interest and equity costs associated
with construction projects in a regulated utility. This is consistent with APS returning to a
vertically-integrated utility, as evidenced by APS 2003 general rate case filing, which includes
the request for rate recognition of generation assets. Prior to 2003, APS capitalized interest in
accordance with SFAS No. 34, Capitalization of Interest Cost. Although AFUDC both increases the
plant balance and results in higher current earnings during the construction period, AFUDC is
realized in future revenues through depreciation provisions included in rates. This change
increased earnings by $11 million in 2003 as compared to what it would have been under SFAS No. 34. Electric Revenues We derive electric revenues from sales of electricity to our regulated Native Load customers
and sales to other parties from our marketing and trading activities. Revenues related to the sale
of electricity are generally recorded when service is rendered or electricity is delivered to
customers. However, the determination and billing of electricity sales to individual Native Load
customers is based on the reading of their meters, which occurs on a systematic basis throughout
the month. At the end of each month, amounts of electricity delivered to customers since the date
of the last meter reading and billing and the corresponding unbilled revenue are estimated. We
exclude sales taxes on electric revenues from both revenue and taxes other than income taxes. Revenues from our Native Load customers and non-derivative instruments are reported on a gross
basis on Pinnacle Wests Consolidated Statements of Income. In the electricity business, some
contracts to purchase energy are netted against other contracts to sell energy. This is called
book-out and usually occurs in contracts that have the same terms (quantities and delivery
points) and for which power does not flow. We net these book-outs, which reduces both revenues and
purchased power and fuel costs. All gains and losses (realized and unrealized) on energy trading contracts that qualify as
derivatives are included in marketing and trading segment revenues on the Consolidated Statements
of Income on a net basis. Real Estate Revenues SunCor recognizes revenue from land, home and qualifying commercial operating assets sales in
full, provided (a) the income is determinable, that is, the collectibility of the sales price is
reasonably assured or the amount that will not be collectible can be estimated, and (b) the
earnings process is virtually complete, that is, SunCor is not obligated to perform significant
activities after the sale to earn the income. Unless both conditions exist, recognition of all or
part of the income is postponed under the percentage of completion
method per SFAS No. 66, Accounting for Sales of Real
Estate. SunCor recognizes income only after the assets title has passed.
A single method of recognizing income is applied to all sales transactions within an entire home,
land or commercial development project. Commercial property and management revenues are recorded
over the term of the lease or period in which services are provided. In addition, see Note 22 
Discontinued Operations. 77




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Real Estate Investments Real estate investments primarily include SunCors land, home inventory and investments in
joint ventures. Land includes acquisition costs, infrastructure costs, property taxes and
capitalized interest directly associated with the acquisition and development of each project.
Land under development and land held for future development are stated at accumulated cost, except
that, to the extent that such land is believed to be impaired, it is written down to fair value.
Land held for sale is stated at the lower of accumulated cost or estimated fair value less costs to
sell. Home inventory consists of construction costs, improved lot costs, capitalized interest and
property taxes on homes under construction. Home inventory is stated at the lower of accumulated
cost or estimated fair value less costs to sell. Investments in joint ventures for which SunCor
does not have a controlling financial interest are not consolidated but are accounted for using the
equity method of accounting. In 2003, SunCor acquired two joint ventures for $10 million and
consolidated $53 million of assets and $43 million of liabilities, which are included on the
Consolidated Balance Sheets at December 31, 2003. The $10 million cash investment is included on
the other investing line of the Consolidated Statements of Cash Flow at December 31, 2003. In
addition, see Note 22  Discontinued Operations. Cash and Cash Equivalents We consider all highly liquid investments purchased with an initial maturity of three months
or less to be cash equivalents. We have investments in auction rate securities in which interest rates are reset on a
short-term basis; however, the underlying contract maturity dates extend beyond three months. We classify the investments in auction rate securities as investments
in debt securities on our Consolidated Balance Sheets. We
have reclassified cash at December 31, 2003 of $92 million to investment in debt securities.
Included in that reclassification is $70 million related to APS.
The purchase and sale activities
related to these investments have also been reclassified on the Consolidated Statement of Cash
Flows. Nuclear Fuel APS charges nuclear fuel to fuel expense by using the unit-of-production method. The
unit-of-production method is an amortization method based on actual physical usage. APS divides
the cost of the fuel by the estimated number of thermal units it expects to produce with that fuel.
APS then multiplies that rate by the number of thermal units produced within the current period.
This calculation determines the current period nuclear fuel expense. APS also charges nuclear fuel expense for the permanent disposal of spent nuclear fuel. The
DOE is responsible for the permanent disposal of spent nuclear fuel, and it charges APS $0.001 per
kWh of nuclear generation. See Note 11 for information about spent nuclear fuel disposal and Note
12 for information on nuclear decommissioning costs. Income Taxes Income taxes are provided using the asset and liability approach prescribed by SFAS No. 109,
Accounting for Income Taxes. We file our federal income tax return on a consolidated basis and
we file our state income tax returns on a consolidated or unitary basis. In accordance with our
intercompany tax sharing agreement, federal and state income taxes are allocated to each subsidiary 78




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS as though each subsidiary filed a separate income tax return. Any difference between that
method and the consolidated (and unitary) income tax liability is attributed to the parent company.
See Note 4. Reacquired Debt Costs For reacquired debt costs related to the regulated portion of APS business, APS defers those
gains and losses incurred upon early retirement and is seeking recovery of the net amount of losses
in the APS general rate case (see Note 3). Stock-Based Compensation In 2002, we began applying the fair value method of accounting for stock-based compensation,
as provided for in SFAS No. 123, Accounting for Stock-Based Compensation. The fair value method
of accounting is the preferred method. In accordance with the transition requirements of SFAS No.
123, we applied the fair value method prospectively, beginning with 2002 stock grants. In prior
years, we recognized stock compensation expense based on the intrinsic value method allowed in
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. The following chart compares our net income, stock compensation expense and earnings per share
to what those items would have been if we had recorded stock compensation expense based on the fair
value method for all stock grants through 2004 (dollars in thousands, except per share amounts): 2004
    
    
    2003
    
    
    2002Net Income as reported:
    
    $
    243,195
    
    
    $
    240,579
    
    
    $
    149,408Add: Stock compensation
expense included in
reported net income (net of
tax)
    
    
    4,690
    
    
    
    3,514
    
    
    
    2,347Deduct: Total stock
compensation expense
determined under fair value
method (net of tax)
    
    
    (5,311
    )
    
    
    (5,220
    )
    
    
    (3,742
    )Pro forma net income
    
    $
    242,574
    
    
    $
    238,873
    
    
    $
    148,013Earnings per share  basic:As reported
    
    $
    2.66
    
    
    $
    2.64
    
    
    $
    1.76Pro forma (fair value method)
    
    $
    2.65
    
    
    $
    2.62
    
    
    $
    1.74Earnings per share  diluted:As reported
    
    $
    2.66
    
    
    $
    2.63
    
    
    $
    1.76Pro forma (fair value method)
    
    $
    2.65
    
    
    $
    2.61
    
    
    $
    1.74
 In order to calculate the fair value of the 2004, 2003 and 2002 stock option grants and the
pro forma information above, we calculated the fair value of each fixed stock option in the
incentive plans using the Black-Scholes option-pricing model. The fair value was calculated based
on the date 79




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the option was granted. The following weighted-average assumptions were also used in order to
calculate the fair value of the stock options: 2004
    
    
    2003
    
    
    2002Risk-free interest rate
    
    
    3.15
    %
    
    
    3.35
    %
    
    
    4.17
    %Dividend yield
    
    
    4.76
    %
    
    
    5.26
    %
    
    
    4.17
    %Volatility
    
    
    17.04
    %
    
    
    38.03
    %
    
    
    22.59
    %Expected life (months)
    
    
    60
    
    
    
    60
    
    
    
    60
 See Note 16 for further discussion about our stock compensation plans. Intangible Assets We have no goodwill recorded and have separately disclosed other intangible assets on Pinnacle
Wests Consolidated Balance Sheets in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. The intangible assets are amortized over their finite
useful lives. Amortization expense was $34 million in 2004, $25 million in 2003, and $21 million in 2002. Estimated amortization expense on
existing intangible assets over the next five years is $33 million in 2005, $31 million in 2006,
$25 million in 2007, $16 million in 2008, and $1 million in 2009. At December 31, 2004, the
weighted average amortization period for intangible assets is 7 years. 2. New Accounting Standards In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. The standard
establishes accounting for transactions in which an entity exchanges its equity instruments for
goods or services. It also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entitys equity instruments
or that may be settled by the issuance of those equity instruments. SFAS No. 123R is effective as
of the beginning of the first interim or annual period that begins after June 15, 2005. We are
currently accounting for stock-based compensation using the fair value method and are evaluating
the impacts of this new guidance, but we do not believe it will have a material impact on our
financial statements. See the following Notes for information about new accounting standards and other accounting
matters:  
    Note 8 for FSP 106-2 regarding the Medicare Prescription Drug, Improvement and
Modernization Act related to retirement plans and other benefits;
    Note 18 for EITF 02-3 and DIG Issue No. C15 related to accounting for derivatives
and energy contracts; and
    Note 20 for FIN No. 46R related to variable interest entities. 80




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Regulatory Matters Electric Industry Restructuring State APS General Rate Case; 2004 Settlement Agreement On June 27, 2003, APS filed a general rate case with the ACC and requested a $175.1 million,
or 9.8%, increase in its annual retail electricity revenues, intended to become effective July 1,
2004. In this rate case, APS updated its cost of service and rate design. The general rate case also addresses the implementation of rate adjustment mechanisms that
were the subject of ACC hearings in April 2003. The rate adjustment mechanisms, which were
authorized as a result of the 1999 Settlement Agreement, would allow APS to recover several types
of costs, the most significant of which are power supply costs (fuel and purchased power costs) and
costs associated with complying with the Rules. On August 18, 2004, a substantial majority of the parties to the rate case, including APS, the
ACC staff, the Arizona Residential Utility Consumer Office, other customer groups, and merchant power plant
intervenors entered into an agreement that proposes terms under which the rate case would be
settled (the 2004 Settlement Agreement). Key financial components of the 2004 Settlement Agreement, which is subject to ACC approval,
are as follows:  
    APS would receive an annual retail rate increase of approximately $75.5 million, or
4.21%. The increase would consist of an increase in base rates of approximately 3.77%
and an increase of approximately 0.44% for recovery over five years of the past costs
of compliance with the ACCs retail electric competition rules.
    APS would acquire the PWEC Dedicated Assets from Pinnacle West Energy, with a net
carrying value of approximately $850 million, and rate base the PWEC Dedicated Assets
at a rate base value of $700 million, which would result in a mandatory rate base
disallowance of $150 million. As a result, for financial reporting purposes, APS would
recognize a one-time, after-tax net plant write-off of approximately $90 million in the
period when the plant transfer to APS is completed and would reduce annual depreciation
expense by approximately $5 million.
    To bridge the time between the effective date of the rate increase and the actual
date the PWEC Dedicated Assets transfer, APS and Pinnacle West Energy would enter into
a cost-based purchase power agreement (the Bridge PPA), which would be based on the
value of the PWEC Dedicated Assets described in the previous bullet point. The Bridge
PPA would remain in effect until the FERC approves the transfer of the PWEC Dedicated
Assets to APS and the transfer is completed.  
    If the FERC were to issue an order denying APS request to acquire the PWEC
Dedicated Assets, the Bridge PPA would become a 30-year purchased power
agreement, with prices reflecting cost-of-service as if APS had 81




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS acquired and rate-based the PWEC Dedicated Assets at the value described
above.  
    If the FERC were to issue an order (a) approving APS request to transfer
the PWEC Dedicated Assets at a value materially less than $700 million, (b)
approving the transfer of fewer than all of the PWEC Dedicated Assets, or (c)
that was materially inconsistent with the 2004 Settlement Agreement, APS would
file an appropriate application with the ACC so that rates could be adjusted.
In these circumstances, the Bridge PPA would continue at least until the
conclusion of the subsequent proceeding to consider any appropriate adjustment
to APS rates.  
    A PSA would provide for the recovery of variations in fuel and purchased
power costs, subject to specified parameters and procedures.
    APS would not restore and recover in rates the $234 million write-off recorded in
1999 as a result of the 1999 Settlement Agreement. As a result, annual amortization
expense for financial reporting purposes would be approximately $16 million less than
if the $234 million write-off had been restored and amortized over a 15-year period as
originally requested.
    APS would adopt longer service lives than originally requested for certain
depreciable assets, which would have the effect of reducing annual depreciation expense
for financial reporting purposes by approximately $26 million. On February 28, 2005, the administrative law judge in the general rate case issued a
recommended order. The recommended order proposes ACC approval of the 2004 Settlement Agreement
with two changes related to the PSA. First, the amount of gas costs that APS could recover under
the annual PSA would be limited to $500 million per year. Second, although the 2004 Settlement
Agreement provides that the PSA would remain in effect for a minimum five-year period, under the
recommended order the ACC would be able to eliminate the PSA at any time, if appropriate, if APS
files a rate case before the expiration of the five-year period or APS does not comply with the
terms of the PSA. If APS exceeds the gas costs that could be recoverable under the PSA or if the
ACC eliminates the PSA, APS would retain the right to file a rate case to reset its base rates. On
March 14, 2005, the parties to the 2004 Settlement Agreement
jointly filed suggested changes to the recommended order
addressing, among other things, the recommended orders proposed
treatment of the PSA. The ACC has scheduled open
meetings on March 25 and March 28, 2005 to consider the
recommended order and suggested changes. APS cannot predict the outcome of this matter. 82




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACC Financing Order On May 12, 2003, APS issued $500 million of debt pursuant to the Financing Order and made a
$500 million loan to Pinnacle West Energy. Pinnacle West Energy distributed the net proceeds of
that loan to us to fund the repayment of a portion of the debt we incurred to finance the
construction of the PWEC Dedicated Assets. The ACC granted the Financing Order subject to various conditions. One of these conditions is
that APS must maintain a common equity ratio of at least forty percent and may not pay common
dividends if such payment would reduce its common equity ratio below that threshold, unless
otherwise waived by the ACC. In addition, the Financing Order required the ACC staff to conduct an inquiry into our and our
affiliates compliance with the retail electric competition and related rules and decisions. On
June 13, 2003, APS submitted its report on these matters to the ACC staff. As part of the 2004
Settlement Agreement, this inquiry would be concluded with no further action by the ACC. Retail Electric Competition Rules The Rules approved by the ACC include the following major provisions:  
    They apply to virtually all Arizona electric utilities regulated by the ACC,
including APS.
    Effective January 1, 2001, retail access became available to all APS retail
electricity customers.
    Electric service providers that get CC&Ns from the ACC can supply only competitive
services, including electric generation, but not electric transmission and
distribution.
    Affected utilities must file ACC tariffs that unbundle rates for noncompetitive
services.
    The ACC shall allow a reasonable opportunity for recovery of unmitigated stranded
costs.
    Absent an ACC waiver, prior to January 1, 2001, each affected utility (except
certain electric cooperatives) must transfer all competitive electric assets and
services to an 83




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS unaffiliated party or parties or to a separate corporate affiliate or affiliates.
Under the 1999 Settlement Agreement, APS received a waiver to allow transfer of its
competitive electric assets and services to affiliates no later than December 31,
2002. However, as discussed below, in 2002 the ACC reversed its decision, as
reflected in the Rules, to require APS to transfer its generation assets. Under the 1999 Settlement Agreement, the Rules are to be interpreted and applied, to the
greatest extent possible, in a manner consistent with the 1999 Settlement Agreement. If the two
cannot be reconciled, APS must seek, and the other parties to the 1999 Settlement Agreement must
support, a waiver of the Rules in favor of the 1999 Settlement Agreement. On November 27, 2000, a Maricopa County, Arizona, Superior Court judge issued a final judgment
holding that the Rules are unconstitutional and unlawful in their entirety due to failure to
establish a fair value rate base for competitive electric service providers and because certain of
the Rules were not submitted to the Arizona Attorney General for certification. The judgment also
invalidates all ACC orders authorizing competitive electric service providers, including APS Energy
Services, to operate in Arizona. We do not believe the ruling affected the 1999 Settlement
Agreement. The 1999 Settlement Agreement was not at issue in the consolidated cases before the
judge. Further, the ACC made findings related to the fair value of APS property in the order
approving the 1999 Settlement Agreement. The ACC and other parties aligned with the ACC appealed
the ruling to the Arizona Court of Appeals, and in January 2004, the Court invalidated some, but
not all, of the Rules as either violative of Arizonas constitutional requirement that the ACC
consider the fair value of a utilitys property in setting rates or as being beyond the ACCs
constitutional and statutory powers. Other Rules were set aside for failure to submit such
regulations to the Arizona Attorney General for approval as required by statute. A request for the
Arizona Supreme Court to review the Court of Appeals decision was denied on January 4, 2005. Track A Order On September 10, 2002, the ACC issued the Track A Order, in which the ACC, among other things:  
    reversed its decision, as reflected in the Rules, to require APS to transfer its
generation assets either to an unrelated third party or to a separate corporate
affiliate; and
    unilaterally modified the 1999 Settlement Agreement, which authorized APS transfer
of its generating assets, and directed APS to cancel its activities to transfer its
generation assets to Pinnacle West Energy. On November 15, 2002, APS filed appeals of the Track A Order in the Maricopa County, Arizona
Superior Court and in the Arizona Court of Appeals. Arizona Public Service Company vs. Arizona
Corporation Commission, CV 2002-0222 32. Arizona Public Service Company vs. Arizona
Corporation Commission, 1CA CC 02-0002. On December 13, 2002, APS and the ACC staff agreed to
principles for resolving certain issues raised by APS in its appeals of the Track A Order. The
major provisions of the principles include, among other things, the following:  
    APS and the ACC staff agreed that it would be appropriate for the ACC to consider
the following matters in APS general rate case, which was filed on June 27, 2003: 84




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
    the generating assets to be included in APS rate base,
including the question of whether the PWEC Dedicated Assets should be included
in APS rate base;
    the appropriate treatment of the $234 million pretax asset
write-off agreed to by APS as part of the 1999 Settlement Agreement; and
    the appropriate treatment of costs incurred by APS in
preparation for the previously anticipated transfer of generation assets to
Pinnacle West Energy.  
    As a result of the ACCs issuance of the Financing Order, APS appeals of the Track
A Order are limited to the issues described in the preceding bullet points. On August 27, 2003, APS, Pinnacle West and Pinnacle West Energy filed a lawsuit asserting
damage claims relating to the Track A Order. Arizona Public Service Company et al. v. The
State of Arizona ex rel., Superior Court of the State of Arizona, County of Maricopa, No.
CV2003-016372. Upon the ACCs issuance of a final, non-appealable order approving the 2004 Settlement
Agreement, APS, Pinnacle West, and Pinnacle West Energy will dismiss the litigation described under
this Track A heading. Track B Order On March 14, 2003, the ACC issued the Track B Order, which required APS to solicit bids for
certain estimated amounts of capacity and energy for periods beginning July 1, 2003. For 2003, APS
was required to solicit competitive bids for about 2,500 MW of capacity and about 4,600
gigawatt-hours of energy, or approximately 20% of APS total retail energy requirements. APS issued requests for proposals in March 2003 and, by May 6, 2003, APS entered into
contracts to meet all or a portion of its requirements for the years 2003 through 2006 as follows:  (1)
    Pinnacle West Energy agreed to provide 1,700 MW in July through September of
2003 and in June through September of 2004, 2005 and 2006, by means of a unit
contingent contract.(2)
    PPL EnergyPlus, LLC agreed to provide 112 MW in July through September of 2003
and 150 MW in June through September of 2004 and 2005, by means of a unit contingent
contract.(3)
    Panda Gila River LP agreed to provide 450 MW in October of 2003 and 2004 and
May of 2004 and 2005, and 225 MW from November 2003 through April 2004 and from
November 2004 through April 2005, by means of firm call options. Effective upon final ACC approval of the 2004 Settlement Agreement and the closing of the
purchase of the Sundance Plant discussed below, the Track B contracts with Pinnacle West Energy and
PPL Energy Plus, LLC will be cancelled. 85




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Request for Proposals and Asset Purchase Agreement In early December 2003, APS issued a request for proposals (2003 RFP) for long-term power
supply resources. On June 1, 2004, APS and PPL Sundance, a wholly-owned subsidiary of PPL
Corporation, entered into an asset purchase agreement by which APS agreed to purchase the Sundance
Plant. The Sundance Plant, which began commercial operation in July 2002, would provide peaking
generation support for APS system and reduce APS growing needs for new generation resources. The
purchase price for the Sundance Plant is approximately $190 million. On June 1, 2004, APS and PPL Sundance filed a joint application with the ACC with respect to
APS proposed acquisition of the Sundance Plant. On January 20, 2005, the ACC issued an order
confirming APS authority to self-build or buy new generation assets for native load and stated
that APS acquisition of the Sundance Plant would be a proper purpose under APS existing ACC
financing authorizations. APS filings with the ACC also had requested that the ACC allow APS to
defer for future recovery certain capital and operating costs (net of fuel and purchased power
savings) associated with the Sundance Plant acquisition until rate treatment for the Sundance Plant
could be considered in APS next general rate case. APS filings estimated that the deferrals
would be approximately $10 million to $15 million before income taxes on an annualized basis. The
order issued by the ACC allows APS to record the deferrals for up to 36 months, subject to a number
of conditions. However, if APS has a general rate case pending at the end of the 36-month period,
the deferral period could extend until the rate case had been decided. The conditions imposed by
the order are expected to substantially limit the amount of deferrals that APS will be able to
record. APS acquisition of the Sundance Plant is subject to FERC approval and to customary closing
conditions. The transaction is targeted to close in the spring of 2005. APS does not expect to enter into any additional transactions as a result of the 2003 RFP. Provider of Last Resort Obligation Although the Rules allow retail customers to have access to competitive providers of energy
and energy services, APS is, under the Rules, the provider of last resort for standard-offer,
full-service customers under rates that have been approved by the ACC. In the event of shortfalls
due to unforeseen increases in load demand or generation or transmission outages, APS may need to
purchase additional supplemental power in the wholesale spot market. At various times, prices in
the spot wholesale market have significantly exceeded the amount included in APS current retail
rates. There can be no assurance that APS would be able to fully recover the costs of this power.
The proposed settlement of APS general rate case, discussed above, would, among other things,
allow APS to recover purchased power costs. 1999 Settlement Agreement The following are the major provisions of a settlement agreement entered into in 1999, as
approved by the ACC:  
    APS has reduced rates for standard-offer service for customers with loads less than
three MW in a series of annual retail electricity price reductions of 1.5% on July 1
for each of the years 1999 to 2003 for a total of 7.5%. Based on the price reductions
authorized in the 1999 Settlement Agreement, there were retail price decreases of 86




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS approximately $24 million ($14 million after taxes), effective July 1, 1999;
approximately $28 million ($17 million after taxes), effective July 1, 2000;
approximately $27 million ($16 million after taxes), effective July 1, 2001;
approximately $28 million ($17 million after taxes), effective July 1, 2002; and
approximately $29 million ($18 million after taxes), effective July 1, 2003. For
customers having loads of three MW or greater, standard-offer rates have been
reduced in varying annual increments that total 5% in the years 1999 through 2002.  
    Unbundled rates being charged by APS for competitive direct access service (for
example, distribution services) became effective upon approval of the 1999 Settlement
Agreement, retroactive to July 1, 1999, and also became subject to annual reductions
beginning January 1, 2000, that vary by rate class, through January 1, 2004.
    There was a moratorium on retail price changes for standard-offer and unbundled
competitive direct access services until July 1, 2004.
    APS is being permitted to defer for later recovery prudent and reasonable costs of
complying with the Rules, system benefits costs in excess of the levels included in
then-current (1999) rates, and costs associated with the provider of last resort and
standard-offer obligations for service after July 1, 2004. These costs are to be
recovered through an adjustment clause or clauses commencing on July 1, 2004, or when
the rate case is decided. See APS General Rate Case; 2004 Settlement Agreement
above.
    APS distribution system opened for retail access effective September 24, 1999.
Customers were eligible for retail access in accordance with the phase-in adopted by
the ACC under the Rules (see Retail Electric Competition Rules above), including an
additional 140 MW being made available to eligible non-residential customers. APS
opened its distribution system to retail access for all customers on January 1, 2001.
    Prior to the 1999 Settlement Agreement, APS was recovering substantially all of its
regulatory assets through July 1, 2004, pursuant to a 1996 regulatory agreement. In
addition, the 1999 Settlement Agreement stated that APS has demonstrated that its
allowable stranded costs, after mitigation and exclusive of regulatory assets, are at
least $533 million net present value (in 1999 dollars). The 1999 Settlement Agreement
also stated that APS will not be allowed to recover $183 million net present value (in
1999 dollars) ($234 million pretax) of the $533 million. The 1999 Settlement Agreement
provided that APS will have the opportunity to recover $350 million net present value
(in 1999 dollars) through a competitive transition charge that will remain in effect
through December 31, 2004, at which time it will terminate. The costs subject to
recovery under the adjustment clause described above will be decreased or increased by
any over/under-recovery of the $350 million due to sales volume variances. As part of
its general rate case request, APS sought the recovery of amounts written off by APS as
a result of the 1999 Settlement Agreement. That claim would be given up under the
terms of the 2004 Settlement Agreement (see above). 87




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
    The 1999 Settlement Agreement required APS to form, or cause to be formed, a
separate corporate affiliate or affiliates and transfer to such affiliate(s) its
competitive electric assets and services no later than December 31, 2002. The 1999
Settlement Agreement provided that APS would be allowed to defer and later collect,
beginning July 1, 2004, 67% of its costs to accomplish the required transfer of
generation assets to an affiliate. However, as discussed above under Track A Order,
in 2002 the ACC unilaterally modified this aspect of the 1999 Settlement Agreement by
issuing an order preventing APS from transferring its generation assets. Under the
2004 Settlement Agreement, APS would recover all costs incurred by APS in preparation
for the previously anticipated transfer of generation assets to Pinnacle West Energy.
See APS General Rate Case; 2004 Settlement Agreement above. Such full recovery of
divestiture costs would be allowed under the 2004 Settlement Agreement (see above). General The regulatory developments and legal challenges to the Rules discussed in this Note have
raised considerable uncertainty about the status and pace of retail electric competition and of
electric restructuring in Arizona. Although some very limited retail competition existed in APS
service area in 1999 and 2000, there are currently no active retail competitors providing unbundled
energy or other utility services to APS customers. As a result, we cannot predict when, and the
extent to which, additional competitors will re-enter APS service territory. As competition in
the electric industry continues to evolve, we will continue to evaluate strategies and alternatives
that will position us to compete in the new regulatory environment. Federal In July 2002, the FERC adopted a price mitigation plan that constrains the price of
electricity in the wholesale spot electricity market in the western United States. The FERC
adopted a price cap of $250 per MWh for the period subsequent to October 31, 2002. Sales at prices
above the cap must be justified and are subject to potential refund. On July 31, 2002, the FERC issued a Notice of Proposed Rulemaking for Standard Market Design
for wholesale electric markets. Voluminous comments and reply comments were filed on virtually
every aspect of the proposed rule. On April 28, 2003, the FERC Staff issued an additional white
paper on the proposed Standard Market Design. The white paper discusses several policy changes to
the proposed Standard Market Design, including a greater emphasis on flexibility for regional
needs. We cannot currently predict what, if any, impact there may be to the Company if the FERC
adopts the proposed rule or any modifications proposed in the comments. The FERC has been, though its Office of Marker Oversight and Investigations (OMOI), in the
process of auditing a number of electric utilities regarding compliance with its regulations.
Such an audit of APS and its affiliates was recently completed, and the FERC has issued an order
approving the OMOI audit report and directing certain compliance actions. Arizona Public
Service Company, 109 FERC ¶ 61,271 (2004). Chief among the FERCs findings, APS must pay $4 million for its use of unauthorized
point-to-point transmission service. Of the $4 million, APS must distribute: (1) $2.75 million to
upgrade the West Phoenix-Lincoln Street 230kV transmission line with high capacity composite 88




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS conductors; and (2) $1.25 million as a contribution to established low income energy assistance
programs in Arizona. APS must not recover these monies from any existing or future wholesale or
retail rate recovery mechanism, nor may it announce the low income payment as a public interest
contribution. APS must also take certain corrective actions and make quarterly filings detailing
its progress in implementing these actions until all are completed. APS believes that the resolution of these matters will not have a material adverse effect on
its financial position, results of operations or liquidity. General The regulatory developments and legal challenges to the Rules discussed in this Note have
raised considerable uncertainty about the status and pace of retail electric competition and of
electric restructuring in Arizona. Although some very limited retail competition existed in APS
service area in 1999 and 2000, there are currently no active retail competitors providing unbundled
energy or other utility services to APS customers. As a result, we cannot predict when, and the
extent to which, additional competitors will re-enter APS service territory. As competition in
the electric industry continues to evolve, we will continue to evaluate strategies and alternatives
that will position us to compete in the new regulatory environment. 4. Income Taxes Certain assets and liabilities are reported differently for income tax purposes than they are
for financial statements. The tax effect of these differences is recorded as deferred taxes. We
calculate deferred taxes using the current income tax rates. APS has recorded a regulatory asset and a regulatory liability related to income taxes on its
Balance Sheets in accordance with SFAS No. 71. The regulatory asset is for certain temporary
differences, primarily the allowance for equity funds used during construction. The regulatory
liability relates to excess deferred taxes resulting primarily from the reduction in federal income
tax rates as part of the Tax Reform Act of 1986. APS amortizes this amount as the differences
reverse. As a result of a change in IRS guidance, we claimed a tax
deduction related to an APS tax accounting method change on the 2001 federal consolidated income
tax return. The accelerated deduction resulted in a $200 million reduction in the current income
tax liability and a corresponding increase in the plant-related deferred tax liability. In 2002,
we received an income tax refund of approximately $115 million related to our 2001 federal
consolidated income tax return. The 2001 federal consolidated income tax return is currently under
examination by the IRS. As part of this ongoing examination, the IRS is reviewing this accounting
method change and the resultant deduction. During 2004, the current income tax liability was
increased, with a corresponding decrease to plant-related deferred tax liability, to reflect the
expected outcome of this audit. We do not expect the ultimate outcome of this examination to have
a material adverse impact on our financial position, results of operations or liquidity. The income tax liability accounts reflect the tax and interest associated with the most
probable resolution of all known and measurable tax exposures. In 2004 and 2003, we resolved certain prior-year issues with the taxing authorities and
recorded tax benefits associated with tax credits and other reductions to income tax expense. 89




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of income tax expense are as follows (dollars in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    200,133
    
    
    $
    22,875
    
    
    $
    (43,492
    )State
    
    
    48,054
    
    
    
    3,752
    
    
    
    (14,732
    )Total current
    
    
    248,187
    
    
    
    26,627
    
    
    
    (58,224
    )Deferred:Income from continuing operations
    
    
    (113,850
    )
    
    
    81,756
    
    
    
    191,135Discontinued operations
    
    
    
    
    
    
    3,706
    
    
    
    5,189Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (43,123
    )Total deferred
    
    
    (113,850
    )
    
    
    85,462
    
    
    
    153,201Total income tax expense
    
    
    134,337
    
    
    
    112,089
    
    
    
    94,977Less: income tax expense/(benefit) on
discontinued operations
    
    
    5,480
    
    
    
    9,616
    
    
    
    (14,045
    )Less: income tax benefit for cumulative
effect of accounting change
    
    
    
    
    
    
    
    
    
    
    (43,123
    )Total income tax expense for income
from continuing operations
    
    $
    128,857
    
    
    $
    102,473
    
    
    $
    152,145
 The following chart compares pretax income from continuing operations at the 35% federal
income tax rate to income tax expense (dollars in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Federal income tax expense at 35%
statutory rate
    
    $
    127,426
    
    
    $
    114,897
    
    
    $
    136,048Increases (reductions) in tax expense
resulting from:State income tax net of federal income
tax benefit
    
    
    13,705
    
    
    
    11,522
    
    
    
    18,114Credits and favorable adjustments
related to prior years resolved in
current year
    
    
    (6,138
    )
    
    
    (17,944
    )
    
    
    Medicare Subsidy Part-D (see Note 8)
    
    
    (1,778
    )
    
    
    
    
    
    
    Allowance for equity funds used during
construction (see Note 1)
    
    
    (1,547
    )
    
    
    (4,984
    )
    
    
    Other
    
    
    (2,811
    )
    
    
    (1,018
    )
    
    
    (2,017
    )Income tax expense
    
    $
    128,857
    
    
    $
    102,473
    
    
    $
    152,145
 The following table sets forth the net deferred income tax liability recognized on the
Consolidated Balance Sheets (dollars in thousands): 90




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31,2004
    
    
    2003Current liability
    
    $
    (9,057
    )
    
    $
    (631
    )Long term liability
    
    
    (1,227,553
    )
    
    
    (1,338,527
    )Accumulated deferred income taxes  net
    
    $
    (1,236,610
    )
    
    $
    (1,339,158
    )
 The components of the net deferred income tax liability were as follows (dollars in
thousands): December 31,2004
    
    
    2003DEFERRED TAX ASSETSRegulatory liabilities:Asset Retirement Obligation
    
    $
    182,086
    
    
    $
    169,322Federal excess deferred income taxes
    
    
    16,341
    
    
    
    18,936Other
    
    
    8,282
    
    
    
    8,302Pension liability
    
    
    91,973
    
    
    
    73,844Risk management and trading activities
    
    
    91,021
    
    
    
    59,293Deferred gain on Palo Verde Unit 2 sale
leaseback
    
    
    19,816
    
    
    
    21,656Other
    
    
    70,849
    
    
    
    64,770Total deferred tax assets
    
    
    480,368
    
    
    
    416,123DEFERRED TAX LIABILITIESPlant-related
    
    
    (1,516,174
    )
    
    
    (1,614,887
    )Risk management and trading activities
    
    
    (146,037
    )
    
    
    (84,124
    )Regulatory assets
    
    
    (54,767
    )
    
    
    (56,270
    )Total deferred tax liabilities
    
    
    (1,716,978
    )
    
    
    (1,755,281
    )Accumulated deferred income taxes  net
    
    $
    (1,236,610
    )
    
    $
    (1,339,158
    )
 5. Lines of Credit and Short-Term Borrowings APS had committed lines of credit with various banks of $325 million at December 31, 2004 and
$250 million at December 31, 2003, which were available either to support the issuance of up to
$250 million in commercial paper or to be used for bank borrowings, including issuance of letters
of credit. The current line matures in May 2007. The commitment fees at December 31, 2004 and 2003
for these lines of credit were 0.15% and 0.175% per annum. APS had no bank borrowings outstanding
under these lines of credit at December 31, 2004 and 2003. APS had approximately $4.8 million
letters of credit issued under the line at December 31, 2004. APS had no commercial paper borrowings outstanding at December 31, 2004 and 2003. By Arizona
statute, APS short-term borrowings cannot exceed 7% of its total capitalization unless approved by
the ACC. Pinnacle West had committed lines of credit of $300 million at December 31, 2004 and $275
million at December 31, 2003, which were available either to support the issuance of up to $250 91




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS million in commercial paper or to be used for bank borrowings, including issuance of letters
of credit. The current lines mature in October 2007. Pinnacle West had no outstanding borrowings
at December 31, 2004 and December 31, 2003. Pinnacle West had approximately $13 million of letters
of credit issued under the line at December 31, 2004 and approximately $15 million of letters of
credit issued under the line at December 31, 2003. The commitment fees were 0.175% in 2004 and
ranged from 0.125% to 0.175% in 2003. Pinnacle West had no commercial paper borrowings outstanding
at December 31, 2004 and 2003. All APS and Pinnacle West bank lines of credit and commercial paper
agreements are unsecured. SunCor had revolving lines of credit totaling $90 million at December 31, 2004 and $120
million at December 31, 2003. The commitment fees were 0.125% in 2004 and 2003. SunCor had $35
million outstanding at December 31, 2004 and $50 million outstanding at December 31, 2003. The
weighted-average interest rate was 4.50% at December 31, 2004 and 2003. Interest for 2004 and 2003
was based on LIBOR plus 2% or prime plus 0.5%. The balance is included in short-term debt on the
Consolidated Balance Sheets. SunCor had other short-term loans in the amount of $36 million at
December 31, 2004 and December 31, 2003. These loans are made up of multiple notes primarily with
variable interest rates based on LIBOR plus 2.5% at December 31, 2004 and 2003. 6. Long-Term Debt APS has retired all first mortgage bonds issued under its 1946 mortgage and deed of trust,
including the first mortgage bonds securing APS senior notes. On April 30, 2004, APS terminated
its mortgage and deed of trust and, as a result, is not able to issue any additional first mortgage
bonds under that mortgage. SunCors short and long-term debt is collateralized by interests in
certain real property and Pinnacle Wests debt is unsecured. The following table presents the
components of long-term debt on the Consolidated Balance Sheets outstanding at December 31, 2004
and 2003 (dollars in thousands): 92




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31,Maturity
    
    InterestDates (a)
    
    Rates
    
    
    2004
    
    
    2003APSFirst mortgage bonds (b)
    
    2004
    
    
    6.625
    %
    
    $
    
    
    
    $
    80,000First mortgage bonds (c)
    
    2028
    
    
    5.50
    %
    
    
    
    
    
    
    25,000First mortgage bonds (d)
    
    2028
    
    
    5.875
    %
    
    
    
    
    
    
    154,000Unamortized discount and premium
    
    
    
    
    
    
    
    
    (7,968
    )
    
    
    (8,631
    )Pollution control bonds (e)
    
    2024-2034
    
    
    (f
    )
    
    
    565,860
    
    
    
    386,860Pollution control bonds with senior
notes
    
    2029
    
    
    5.05
    %
    
    
    90,000
    
    
    
    90,000Unsecured notes (g)
    
    2004
    
    
    5.875
    %
    
    
    
    
    
    
    125,000Unsecured notes
    
    2005
    
    
    6.25
    %
    
    
    100,000
    
    
    
    100,000Unsecured notes
    
    2005
    
    
    7.625
    %
    
    
    300,000
    
    
    
    300,000Unsecured 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 (h)
    
    2014
    
    
    5.80
    %
    
    
    300,000
    
    
    
    Secured note
    
    2014
    
    
    6.00
    %
    
    
    1,900
    
    
    
    Senior notes (i)
    
    2006
    
    
    6.75
    %
    
    
    83,695
    
    
    
    83,695Capitalized lease obligations
    
    2006-2012
    
    
    (j
    )
    
    
    9,854
    
    
    
    11,749Subtotal
    
    
    
    
    
    
    
    
    2,718,341
    
    
    
    2,622,673SUNCORNotes payable
    
    2006-2008
    
    
    (k
    )
    
    
    15,467
    
    
    
    17,125Capitalized lease obligations
    
    2005-2007
    
    
    8.91
    %
    
    
    507
    
    
    
    728Subtotal
    
    
    
    
    
    
    
    
    15,974
    
    
    
    17,853PINNACLE WESTSenior notes (l)
    
    2006
    
    
    6.40
    %
    
    
    302,589
    
    
    
    515,000Unamortized discount and premium
    
    
    
    
    
    
    
    
    (143
    )
    
    
    (270
    )Floating rate senior notes
    
    2005
    
    
    (m
    )
    
    
    165,000
    
    
    
    165,000Capitalized lease obligations
    
    2005-2007
    
    
    5.45
    %
    
    
    389
    
    
    
    1,243Subtotal
    
    
    
    
    
    
    
    
    467,835
    
    
    
    680,973Total long-term debt (n)
    
    
    
    
    
    
    
    
    3,202,150
    
    
    
    3,321,499Less current maturities (n)
    
    
    
    
    
    
    
    
    617,165
    
    
    
    704,914TOTAL LONG-TERM DEBT LESS CURRENT
MATURITIES
    
    
    
    
    
    
    
    $
    2,584,985
    
    
    $
    2,616,585
  (a)
    This schedule does not reflect the timing of redemptions that may occur prior to
maturity.(b)
    On March 1, 2004, APS redeemed at maturity $80 million of its First Mortgage Bonds, 6.625%
Series due 2004.(c)
    On March 31, 2004, APS redeemed $25 million of its First Mortgage Bonds, 5.5% Series due
2028.(d)
    On March 31, 2004, APS redeemed $154 million of its First Mortgage Bonds, 5.875% Series due
2028.(e)
    On March 31, 2004, Navajo County, Arizona Pollution Control Corporation issued $166 million
of variable interest rate pollution control bonds, 2004 Series A-E, due 2034. The bonds were
issued to refinance $166 million of outstanding pollution control bonds. The refinanced bonds
were all $25 million of the Navajo 5.50% bonds due 2028 (see (c) above) and $141 million of
the Navajo 5.875% bonds due 2028 (see (d) above). The Series A-E 93




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  bonds are payable solely from revenues obtained from APS pursuant to a loan agreement
between APS and Navajo County, Arizona Pollution Control Corporation. Also on March 31,
2004, Coconino County, Arizona Pollution Control Corporation issued $13 million of variable
interest rate pollution control bonds, 2004 Series A, due 2034. The bonds were issued to
refinance $13 million of outstanding pollution control bonds. The refinanced bonds were $13
million of the Coconino 5.875% bonds due 2028 (see (d) above). The Series A bonds are
payable solely from revenues obtained from APS pursuant to a loan agreement between APS and
Coconino County, Arizona Pollution Control Corporation.(f)
    The weighted-average rate was 1.89% at December 31, 2004 and 1.51% at December 31, 2003.
Changes in short-term interest rates would affect the costs associated with this debt.(g)
    On February 15, 2004, APS redeemed at maturity $125 million of its 5.875% Notes due 2004.(h)
    On June 29, 2004, APS issued $300 million of 5.80% senior unsecured notes due June 30, 2014.
The proceeds from the sale of the notes were used to redeem $100 million in aggregate
principal amount of APS 6.25% Notes due January 15, 2005 and a portion of $300 million in
aggregate principal amount of APS 7.625% Notes due August 1, 2005.(i)
    Through April 30, 2004, APS had outstanding $84 million of first mortgage bonds (senior note
mortgage bonds) issued to the senior note trustee as collateral for the senior notes, as well
as the $90 million issue due in 2029. The senior note mortgage bonds had the same interest
rate, interest payment dates, maturity and redemption provisions as the senior notes. As long
as the senior note mortgage bonds secured the senior notes, the senior notes effectively
ranked equally with the first mortgage bonds. On April 30, 2004, when APS repaid all of its
first mortgage bonds, other than those that secure senior notes, the senior note mortgage
bonds were released from the senior note indenture, resulting in their no longer securing the senior notes and
ceasing to be outstanding.(j)
    The weighted average rate was 5.78% at December 31, 2004 and 5.55% at December 31, 2003 .
Capital leases are included in property, plant and equipment on the Consolidated Balance
Sheets for both December 31, 2004 and December 31, 2003.(k)
    Multiple notes with variable interest rates based on the lenders prime plus 0.25%, lenders
prime plus 1.75% and LIBOR plus 2.50%. There are also two notes at fixed rates of 8.00% and
10.00%.(l)
    On January 29, 2004, we entered into a fixed-for-floating interest rate swap transaction on
the $300 million 6.40% senior note. The transaction qualifies as a fair value hedge under SFAS No.
133.(m)
    The weighted average rate was 2.06% at December 31, 2004 and 1.98% at December 31, 2003.(n)
    $281 million of pollution control bonds at December 31, 2003 have been reclassified from
long-term to current maturities. The bond holders had the ability to put these bonds to APS
in the short-term on the interest rate reset date. Without a demonstrated intent to finance on a long-term basis (by use of credit agreements that extend for more than one year, etc.), GAAP
requires the classification of the obligations as current maturities. Pinnacle Wests and APS debt covenants related to their respective bank financing
arrangements include a debt-to-total-capitalization ratio and an interest coverage test. Pinnacle
West and APS comply with these covenants and each anticipates it will continue to meet those and
other significant covenant requirements. These covenants require that the ratio of debt to total
capitalization cannot exceed 65% for the Company and for APS. At December 31, 2004, the ratio was
approximately 53% for Pinnacle West and 54% for APS. The provisions regarding interest 94




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS coverage require a minimum cash coverage of two times the interest requirements for each of the
Company and APS. Based on 2004 results, the coverages were approximately 4 times for the Company
and 4 times for APS. Failure to comply with such covenant levels would result in an event of
default which, generally speaking, would require the immediate repayment of the debt subject to the
covenants. Neither Pinnacle Wests nor APS financing agreements contain ratings triggers that would
result in an acceleration of the required interest and principal payments in the event of a ratings
downgrade. However, in the event of a ratings downgrade, Pinnacle West and/or APS may be subject
to increased interest costs under certain financing agreements. All of Pinnacle Wests bank agreements contain cross-default provisions that would result in
defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or
APS were to default under other agreements. All of APS bank agreements contain cross-default
provisions that would result in defaults and the potential acceleration of payment under these bank
agreements if APS were to default under other agreements. Pinnacle Wests and APS credit
agreements generally contain provisions under which the lenders could refuse to advance loans in
the event of a material adverse change in our financial condition or financial prospects, except
that Pinnacle West and APS do not have a material adverse change restriction for revolver
borrowings equal to outstanding commercial paper amounts. The following is a list of principal payments due on Pinnacle Wests total long-term debt and
capitalized lease requirements:  
    $618 million in 2005;
    $398 million in 2006;
    $174 million in 2007;
    $7 million in 2008;
    $1 million in 2009; and
    $2,012 million, thereafter. 7. Common Stock and Treasury Stock Our common stock and treasury stock activity during each of the three years 2004, 2003 and
2002 is as follows (dollars in thousands): 95




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Common Stock
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance at December 31, 2001
    
    
    84,824,947
    
    
    $
    1,536,924
    
    
    
    (101,307
    )
    
    $
    (5,886
    )Common stock issuance
    
    
    6,555,000
    
    
    
    199,238
    
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (150,500
    )
    
    
    (5,971
    )Reissuance of treasury stock
for stock compensation
(net)
    
    
    
    
    
    
    
    
    
    
    126,977
    
    
    
    7,499Other
    
    
    
    
    
    
    1,096
    
    
    
    
    
    
    
    Balance at December 31, 2002
    
    
    91,379,947
    
    
    
    1,737,258
    
    
    
    (124,830
    )
    
    
    (4,358
    )Reissuance of treasury stock
for stock compensation
(net)
    
    
    
    
    
    
    
    
    
    
    32,815
    
    
    
    1,085Other
    
    
    
    
    
    
    7,096
    
    
    
    
    
    
    
    Balance 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
    )
 8. Retirement Plans and Other Benefits Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a
non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and
our subsidiaries. Effective January 1, 2003, Pinnacle West sponsored a new account balance plan
for all new employees in place of the defined benefit plan and, as of April 1, 2003, the plan was
offered as an alternative to the defined benefit plan for all existing employees. A defined
benefit plan specifies the amount of benefits a plan participant is to receive using information
about the participant. The pension plan covers nearly all of our employees. The supplemental
excess benefit retirement plan covers officers of the Company and highly compensated employees
designated for participation by the Board of Directors. Our employees do not contribute to the
plans. Generally, we calculate the benefits based on age, years of service and pay. Pinnacle West also sponsors other postretirement benefits for the employees of Pinnacle West
and our subsidiaries. We provide medical and life insurance benefits to retired employees.
Employees must retire to become eligible for these retirement benefits, which are based on years of
service and age. For the medical insurance plans, retirees make contributions to cover a portion
of the plan costs. For the life insurance plan, retirees do not make contributions. We retain the
right to change or eliminate these benefits. Pinnacle West uses a December 31 measurement date for its pension and other postretirement
benefit plans. 96




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act). One feature of the Act is a government subsidy of
prescription drug cost. The FASB issued FSP 106-2, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, to address the
accounting for the effects of the Act. During the third quarter of 2004, we retroactively adopted
the provisions of FSP 106-2, resulting in the remeasurement of our postretirement benefit plans
accumulated postretirement benefit obligation as of December 31, 2003. The impact of the subsidy
is a decrease in the accumulated projected benefit obligation of approximately $65 million and a
decrease of approximately $11 million in the net periodic postretirement benefit cost for 2004.
The 2004 after-tax reduction to expense is approximately $5 million, excluding amounts capitalized
as construction overhead or billed to electric plant participants. The following table provides details of the plans benefit costs. Also included is the
portion of these costs charged to expense, including administrative costs and excluding amounts
capitalized as overhead construction or billed to electric plant participants (dollars in
thousands): Pension
    
    
    Other Benefits2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Service cost-benefits
earned during the
period
    
    $
    41,207
    
    
    $
    37,662
    
    
    $
    30,333
    
    
    $
    17,557
    
    
    $
    15,858
    
    
    $
    12,036Interest cost on benefit
obligation
    
    
    81,873
    
    
    
    76,951
    
    
    
    71,242
    
    
    
    29,488
    
    
    
    30,163
    
    
    
    25,235Expected return on plan
assets
    
    
    (78,790
    )
    
    
    (65,046
    )
    
    
    (75,652
    )
    
    
    (24,773
    )
    
    
    (18,762
    )
    
    
    (21,116
    )Amortization of:Transition
(asset)/obligation
    
    
    (3,227
    )
    
    
    (3,227
    )
    
    
    (3,227
    )
    
    
    3,005
    
    
    
    3,005
    
    
    
    4,001Prior service
cost/(credit)
    
    
    2,401
    
    
    
    2,401
    
    
    
    2,912
    
    
    
    (125
    )
    
    
    (125
    )
    
    
    (75
    )Net actuarial
loss
    
    
    17,946
    
    
    
    18,135
    
    
    
    1,846
    
    
    
    7,414
    
    
    
    9,714
    
    
    
    3,072Net periodic benefit
cost
    
    $
    61,410
    
    
    $
    66,876
    
    
    $
    27,454
    
    
    $
    32,566
    
    
    $
    39,853
    
    
    $
    23,153Portion of cost charged to
expense
    
    $
    25,792
    
    
    $
    30,094
    
    
    $
    13,727
    
    
    $
    13,678
    
    
    $
    17,934
    
    
    $
    11,577APS share of costs
charged to expense
    
    $
    22,483
    
    
    $
    25,450
    
    
    $
    10,947
    
    
    $
    11,923
    
    
    $
    15,166
    
    
    $
    9,232
 97




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the plans changes in the benefit obligations for the plan
years 2004 and 2003 (dollars in thousands): Pension
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Benefit obligation at January 1
    
    $
    1,307,628
    
    
    $
    1,069,577
    
    
    $
    540,181
    
    
    $
    409,874Service cost
    
    
    41,207
    
    
    
    37,662
    
    
    
    17,557
    
    
    
    15,858Interest cost
    
    
    81,873
    
    
    
    76,951
    
    
    
    29,488
    
    
    
    30,163Benefit payments
    
    
    (45,195
    )
    
    
    (43,869
    )
    
    
    (14,332
    )
    
    
    (15,749
    )Actuarial losses/(gains)
    
    
    68,731
    
    
    
    171,420
    
    
    
    (36,681
    )
    
    
    106,475Plan amendments
    
    
    
    
    
    
    (4,113
    )
    
    
    
    
    
    
    (6,440
    )Benefit obligation at December 31
    
    $
    1,454,244
    
    
    $
    1,307,628
    
    
    $
    536,213
    
    
    $
    540,181
 The following table sets forth the qualified pension plan and other benefit plan changes in
the fair value of plan assets for the years 2004 and 2003 (dollars in thousands): Pension
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Fair value of plan assets
at January 1
    
    $
    887,311
    
    
    $
    720,807
    
    
    $
    294,051
    
    
    $
    223,474Actual return on plan assets
    
    
    102,829
    
    
    
    162,571
    
    
    
    32,433
    
    
    
    46,071Employer contributions
    
    
    35,000
    
    
    
    46,000
    
    
    
    32,600
    
    
    
    39,852Benefit payments
    
    
    (42,858
    )
    
    
    (42,067
    )
    
    
    (7,000
    )
    
    
    (15,346
    )Fair value of plan assets at
December 31
    
    $
    982,282
    
    
    $
    887,311
    
    
    $
    352,084
    
    
    $
    294,051
 The following table shows a reconciliation of the funded status of the plans to the amounts
recognized on the Consolidated Balance Sheets as of December 31, 2004 and 2003 (dollars in
thousands): Pension
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Funded status at December 31
    
    $
    (471,962
    )
    
    $
    (420,317
    )
    
    $
    (184,129
    )
    
    $
    (246,130
    )Unrecognized net transition (asset)/
obligation
    
    
    (3,873
    )
    
    
    (7,099
    )
    
    
    24,039
    
    
    
    27,044Unrecognized prior service
cost/(credit)
    
    
    14,234
    
    
    
    16,634
    
    
    
    (1,422
    )
    
    
    (1,547
    )Unrecognized net actuarial
losses
    
    
    375,980
    
    
    
    348,982
    
    
    
    158,271
    
    
    
    217,611Benefit liability recognized in the
Consolidated Balance Sheets
    
    $
    (85,621
    )
    
    $
    (61,800
    )
    
    $
    (3,241
    )
    
    $
    (3,022
    )
 98




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following sets forth the details related to benefits included on the Consolidated Balance
Sheets at December 31, 2004 and 2003 (dollars in thousands): Pension
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Accrued benefit cost
    
    $
    (85,621
    )
    
    $
    (61,800
    )
    
    $
    (3,241
    )
    
    $
    (3,022
    )Additional minimum liability
    
    
    (148,824
    )
    
    
    (126,241
    )
    
    
    
    
    
    
    Total liability
    
    
    (234,445
    )
    
    
    (188,041
    )
    
    
    (3,241
    )
    
    
    (3,022
    )Intangible asset
    
    
    14,234
    
    
    
    16,634
    
    
    
    
    
    
    
    Accumulated other comprehensive
loss (pretax)
    
    
    134,590
    
    
    
    109,607
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    (85,621
    )
    
    $
    (61,800
    )
    
    $
    (3,241
    )
    
    $
    (3,022
    )
 The following table sets forth the other comprehensive income arising from the change in
additional minimum liability for the years ended December 31, 2004 and 2003 (dollars in thousands): 2004
    
    
    2003Decrease (increase) in minimum liability included
in other comprehensive income  net of tax:Pinnacle West consolidated
    
    $
    (15,225
    )
    
    $
    4,700APS share
    
    $
    (13,930
    )
    
    $
    4,329
 The following table sets forth the projected benefit obligation and the accumulated benefit
obligation for pension plans in excess of plan assets for the plan years 2004 and 2003 (dollars in
thousands): 2004
    
    
    2003Projected benefit obligation
    
    $
    1,454,244
    
    
    $
    1,307,628Accumulated benefit obligation
    
    $
    1,216,727
    
    
    $
    1,075,352Less fair value of plan assets
    
    
    982,282
    
    
    
    887,311Pinnacle West pension liability
    
    $
    234,445
    
    
    $
    188,041APS share of pension liability
    
    $
    203,668
    
    
    $
    160,639
 Below are the weighted-average assumptions for both the pension and other benefits used to
determine each respective benefit obligation and net periodic benefit cost: 99




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Benefit CostsBenefit Obligations
    
    
    For the Years EndedAs of December 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Discount rate-pension
    
    
    5.84
    %
    
    
    6.10
    %
    
    
    6.10
    %
    
    
    6.75
    %Discount rate-other benefits
    
    
    5.92
    %
    
    
    6.10
    %
    
    
    6.10
    %
    
    
    6.75
    %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
    
    
    2009
    
    
    
    2008
    
    
    
    2008
    
    
    
    2007
 In selecting the pretax expected long-term rate of return on plan assets we consider past
performance and economic forecasts for the types of investments held by the plan. For the year 2005
we are assuming a 9% rate of return on plan assets. As recent history has demonstrated, markets
may decline and increase dramatically. However, we believe the long-term rate of return on plan
assets of 9% is reasonable given our asset allocation in relation to historical and expected future
performance. Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A 1% change in the assumed initial and ultimate health care cost trend rates
would have the following effects (dollars in millions): 1% Increase
    
    
    1% DecreaseEffect on other postretirement benefits
expense, after consideration of amounts
capitalized or billed to electric plant
participants
    
    $
    6
    
    
    
    ($5
    )Effect on service and interest cost
components of net periodic other
postretirement benefit costs
    
    $
    10
    
    
    
    ($8
    )Effect on the accumulated other
postretirement benefit obligation
    
    $
    96
    
    
    
    ($76
    )
 Plan Assets Pinnacle Wests qualified pension plan asset allocation at December 31, 2004 and 2003 is as
follows: 100




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Percentage of Plan Assetsat December 31,
    
    
    Target Asset AllocationAsset Category:
    
    2004
    
    
    2003Equity securities
    
    
    60
    %
    
    
    65
    %
    
    
    60
    %Fixed Income
    
    
    27
    
    
    
    23
    
    
    
    30
    %Other
    
    
    13
    
    
    
    12
    
    
    
    10
    %Total
    
    
    100
    %
    
    
    100
    %
 The Board of Directors has established an investment policy for the pension plan assets and
has delegated oversight of the plan assets to an Investment Management Committee. The investment
policy sets forth the objective of providing for future pension benefits by maximizing return
consistent with acceptable levels of risk. The primary investment strategies are diversification
of assets, stated asset allocation targets and ranges, prohibition of investments in Pinnacle West
securities, and external management of plan assets. Pinnacle Wests other postretirement benefit plans asset allocation at December 31, 2004 and
2003, is as follows: Percentage of Plan Assetsat December 31,
    
    
    Target Asset AllocationAsset Category:
    
    2004
    
    
    2003Equity securities
    
    
    71
    %
    
    
    71
    %
    
    
    70
    %Fixed Income
    
    
    23
    
    
    
    25
    
    
    
    27
    %Other
    
    
    6
    
    
    
    4
    
    
    
    3
    %Total
    
    
    100
    %
    
    
    100
    %
 The Investment Management Committee, described above, has also been delegated oversight of the
plan assets for the postretirement benefit plans. The investment policy for other postretirement
benefit plans assets is similar to that of the pension plan assets described above. Contributions The minimum required contribution to be made to our pension plan in 2005 is estimated to be
approximately $50 million. The contribution to be made to other postretirement benefit plans in
2005 is estimated to be approximately $40 million. APS share is approximately 92% of both plans. Estimated Future Benefit Payments Benefit payments, which reflect estimated future employee service, for the next five years and
the succeeding five years thereafter are estimated to be as follows (dollars in thousands): 101




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pension
    
    
    Other Benefits (a)2005
    
    $
    47,365
    
    
    $
    15,5952006
    
    
    50,848
    
    
    
    15,4702007
    
    
    54,381
    
    
    
    16,9472008
    
    
    59,021
    
    
    
    18,4042009
    
    
    64,858
    
    
    
    20,095Years 2010-2014
    
    
    443,578
    
    
    
    139,329
  (a)
    The expected future other benefit payments take into account the Medicare Part
D subsidy. Employee Savings Plan Benefits Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle
West and subsidiaries. In 2004 APS represented 91% of the total cost of this plan. In a defined
contribution savings plan, the benefits a participant receives result from regular contributions
participants make to their own individual account. Under this plan, the Company matches a
percentage of the participants contributions in the form of Pinnacle West stock. After a five
year vesting period, participants have an option to transfer the Company matching contributions out
of the Pinnacle West Stock Fund to other investment funds within the plan. At December 31, 2004,
approximately 22% of total plan assets were in Pinnacle West stock. Pinnacle West recorded
expenses for this plan of approximately $5 million for each of the years 2004, 2003 and 2002. APS
recorded expenses for this plan of approximately $5 million in 2004, $5 million in 2003 and $4
million in 2002. 9. Leases In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common facilities in
three separate sale leaseback transactions. APS accounts for these leases as operating leases.
The gain resulting from the transaction of approximately $140 million was deferred and is being
amortized to operations and maintenance expense over 29.5 years, the original term of the leases.
There are options to renew the leases for two additional years and to purchase the property for
fair market value at the end of the lease terms. Rent expense is calculated on a straight-line
basis. See Note 20 for a discussion of VIEs, including the SPEs involved in the Palo Verde sale
leaseback transactions. In addition, we lease certain land, buildings, equipment, vehicles and miscellaneous other
items through operating rental agreements with varying terms, provisions and expiration dates. Total lease expense recognized in the Consolidated Statements of Income was $69 million in
2004, $67 million in 2003 and $67 million in 2002. The amounts to be paid for the Palo Verde Unit 2 leases are approximately $49 million per year
for the years 2005 to 2015. Estimated future minimum lease payments for Pinnacle Wests operating leases are approximately
as follows (dollars in millions): 102




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year2005
    
    $
    732006
    
    
    702007
    
    
    692008
    
    
    672009
    
    
    65Thereafter
    
    
    368Total future lease commitments
    
    $
    712
 10. Jointly-Owned Facilities APS shares ownership of some of its generating and transmission facilities with other
companies. Pinnacle West Energy shares ownership of its Silverhawk Plant. Our share of operating
and maintaining these facilities is included in the Consolidated Statements of Income in operations
and maintenance expense. The following table shows APS and Pinnacle West Energys interests in
those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2004
(dollars in thousands): ConstructionPercent
    
    
    Plant in
    
    
    Accumulated
    
    
    Work inOwned
    
    
    Service
    
    
    Depreciation
    
    
    ProgressAPS:Generating facilities:Palo Verde Units 1 and 3
    
    
    29.1
    %
    
    $
    1,877,846
    
    
    $
    (915,611
    )
    
    $
    51,914Palo Verde Unit 2 (see Note 9)
    
    
    17.0
    %
    
    
    665,994
    
    
    
    (253,083
    )
    
    
    15,816Four Corners Units 4 and 5
    
    
    15.0
    %
    
    
    147,067
    
    
    
    (83,525
    )
    
    
    457Navajo Generating Station
Units 1, 2 and 3
    
    
    14.0
    %
    
    
    248,509
    
    
    
    (117,922
    )
    
    
    2,132Cholla common facilities (a)
    
    
    62.4
    %(b)
    
    
    80,122
    
    
    
    (47,134
    )
    
    
    1,553Transmission facilities:ANPP500KV System
    
    
    35.8
    %(b)
    
    
    67,762
    
    
    
    (27,898
    )
    
    
    1,026Navajo Southern System
    
    
    31.4
    %(b)
    
    
    27,044
    
    
    
    (16,880
    )
    
    
    1,576Palo Verde  Yuma 500KV System
    
    
    23.9
    %(b)
    
    
    10,347
    
    
    
    (4,545
    )
    
    
    26Four Corners Switchyards
    
    
    27.5
    %(b)
    
    
    2,852
    
    
    
    (1,801
    )
    
    
    Phoenix  Mead System
    
    
    17.1
    %(b)
    
    
    36,418
    
    
    
    (2,723
    )
    
    
    Palo Verde  Estrella 500KV System
    
    
    55.5
    %(b)
    
    
    72,613
    
    
    
    (2,907
    )
    
    
    841Palo Verde  Southeast Valley Project
    
    
    15.0
    %(b)
    
    
    
    
    
    
    
    
    
    
    1,136Harquahala
    
    
    80.0
    %(b)
    
    
    
    
    
    
    
    
    
    
    10Pinnacle West Energy:Generating Facilities:Silverhawk
    
    
    75.0
    %
    
    
    301,288
    
    
    
    (6,954
    )
    
    
    21
   (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. 103




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Commitments and Contingencies Palo Verde Nuclear Generating Station Spent Nuclear Fuel and Waste Disposal Nuclear power plant operators are required to enter into spent fuel disposal contracts with
the DOE, and the DOE is required to accept and dispose of all spent nuclear fuel and other
high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste Act
required the DOE to develop a permanent repository for the storage and disposal of spent nuclear
fuel by 1998, the DOE has announced that the repository cannot be completed before 2010 and it does
not intend to begin accepting spent nuclear fuel prior to that date. In November 1997, the United
States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued a decision
preventing the DOE from excusing its own delay, but refused to order the DOE to begin accepting
spent nuclear fuel. Based on this decision and the DOEs delay, a number of utilities, including
APS (on behalf of itself and the other Palo Verde owners), filed damages actions against the DOE in
the Court of Federal Claims. Arizona Public Service Company v. United States of America,
United States Court of Federal Claims, 03-2832C. In February 2002, the Secretary of Energy recommended to President Bush that the Yucca
Mountain, Nevada site be developed as a permanent repository for spent nuclear fuel. The President
transmitted this recommendation to Congress and the State of Nevada vetoed the Presidents
recommendation. Congress approved the Yucca Mountain site, overriding the Nevada veto. The State
of Nevada has filed several lawsuits relating to the Yucca Mountain site. We cannot currently
predict what further steps will be taken in this area. APS has existing fuel storage pools at Palo Verde and is operating a new facility for on-site
dry storage of spent nuclear fuel. With the existing storage pools and the addition of the new
facility, APS believes spent nuclear fuel storage or disposal methods will be available for use by
Palo Verde to allow its continued operation through the term of the operating license for each Palo
Verde unit. Although some low-level waste has been stored on-site in a low-level waste facility, APS is
currently shipping low-level waste to off-site facilities. APS currently believes interim
low-level waste storage methods are or will be available for use by Palo Verde to allow its
continued operation and to safely store low-level waste until a permanent disposal facility is
available. APS currently estimates it will incur $115 million (in 2004 dollars) over the life of Palo
Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel. As
of December 31, 2004, APS had spent $11 million for on-site interim spent nuclear fuel storage.
APS has recorded a regulatory asset of $11 million and is currently seeking recovery of these costs
through future rates (see APS General Rate Case; 2004 Settlement Agreement in Note 3). APS believes that scientific and financial aspects of the issues of spent nuclear fuel and
low-level waste storage and disposal can be resolved satisfactorily. However, APS acknowledges
that their ultimate resolution in a timely fashion will require political resolve and action on
national and regional scales which APS is less able to predict. APS expects to vigorously protect
and pursue its rights related to this matter. 104




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nuclear Insurance The Palo Verde participants have insurance for public liability resulting from nuclear energy
hazards to the full limit of liability under federal law. This potential liability is covered by
primary liability insurance provided by commercial insurance carriers in the amount of $300 million
and the balance by an industry-wide retrospective assessment program. If losses at any nuclear
power plant covered by the programs exceed the accumulated funds, APS could be assessed
retrospective premium adjustments. The maximum assessment per reactor under the program for each
nuclear incident is approximately $101 million, subject to an annual limit of $10 million per
incident. Based on APS interest in the three Palo Verde units, APS maximum potential assessment
per incident for all three units is approximately $88 million, with an annual payment limitation of
approximately $9 million. The Palo Verde participants maintain all risk (including nuclear hazards) insurance for
property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75
billion, a substantial portion of which must first be applied to stabilization and decontamination.
APS has also secured insurance against portions of any increased cost of generation or purchased
power and business interruption resulting from a sudden and unforeseen outage of any of the three
units. The insurance coverage discussed in this and the previous paragraph is subject to certain
policy conditions and exclusions. Purchased Power and Fuel Commitments APS and Pinnacle West are parties to various purchased power and fuel contracts with terms
expiring from 2005 through 2025 that include required purchase provisions. We estimate the
contract requirements to be approximately $187 million in 2005; $90 million in 2006; $81 million in
2007; $66 million in 2008; $68 million in 2009 and $363 million thereafter. However, these amounts
may vary significantly pursuant to certain provisions in such contracts that permit us to decrease
required purchases under certain circumstances. Of the various purchased power and fuel contracts mentioned above some of those contracts have
take-or-pay provisions. The contracts APS has for the supply of its coal supply have take-or-pay
provisions. The current take-or-pay coal contracts have terms that expire in 2016. The following table summarizes the estimated take-or-pay commitments for the existing terms
(dollars in millions): EstimatedYears Ending December 31,2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterCoal take-or-pay
commitments (a)
    
    $
    48
    
    
    $
    48
    
    
    $
    49
    
    
    $
    42
    
    
    $
    44
    
    
    $
    311
   (a)
    
    Total take-or-pay commitments are approximately $542 million. The total net
present value of these commitments is approximately $389 million. 105




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Coal Mine Reclamation Obligations APS must reimburse certain coal providers for amounts incurred for coal mine reclamation.
APS coal mine reclamation obligation was $61 million at December 31, 2004 and $60 million at
December 31, 2003 and is included in deferred credits-other on the Consolidated Balance Sheets. California Energy Market Issues and Refunds in the Pacific Northwest FERCIn July 2001, the FERC ordered an expedited fact-finding hearing to calculate refunds
for spot market transactions in California during a specified time frame. APS was a seller and a
purchaser in the California markets at issue, and to the extent that refunds are ordered, APS
should be a recipient as well as a payor of such amounts. The FERC is still considering the
evidence and refund amounts have not yet been finalized. APS does not anticipate material changes
in its exposure and still believes, subject to the finalization of the revised proxy prices, that
it will be entitled to a net refund. On March 19, 2002, the State of California filed a complaint with the FERC alleging that
wholesale sellers of power and energy, including the Company, failed to properly file rate
information at the FERC in connection with sales to California from 2000 to the present under
market-based rates. State of California v. British Columbia Power Exchange et al., Docket
No. EL02-71-000. The complaint requests the FERC to require the wholesale sellers to refund any
rates that are found to exceed just and reasonable levels. This complaint was dismissed by the
FERC and the State of California appealed the matter to the Ninth Circuit Court of Appeals. In an
order issued September 9, 2004, the Ninth Circuit upheld the FERCs authority to permit
market-based rates, but rejected the FERCs claim that it was without authority to consider
retroactive refunds when a utility has not strictly adhered to the quarterly reporting requirements
of the market-based rate system. On September 9, 2004, the Ninth Circuit remanded the case to the
FERC for further proceedings. State of California ex rel. Bill Lockyer, Attorney General v.
FERC, No. 02-73093. Several of the intervenors in this appeal filed a petition for rehearing
of this decision on October 25, 2004. The outcome of the further proceedings cannot be predicted
at this time. The FERC also ordered an evidentiary proceeding to discuss and evaluate possible refunds for
the Pacific Northwest. The FERC affirmed the ALJs conclusion that the prices in the Pacific
Northwest were not unreasonable or unjust and refunds should not be ordered in this proceeding.
This decision has now been appealed to the Court of Appeals (Ninth Circuit). Although the FERC
ruling in the Pacific Northwest matter is being appealed and the FERC has not yet calculated the
specific refund amounts due in California, we do not expect that the resolution of these issues, as
to the amounts alleged in the proceedings, will have a material adverse impact on our financial
position, results of operations or liquidity. On March 26, 2003, FERC made public a Final Report on Price Manipulation in Western Markets,
prepared by its staff and covering spot markets in the West in 2000 and 2001. The report stated
that a significant number of entities who participated in the California markets during the
2000-2001 time period, including APS, may potentially have been involved in arbitrage transactions
that allegedly violated certain provisions of the ISO tariff. After reviewing the matter, along
with the data supplied by APS, the FERC staff moved to dismiss the claims against APS and to
dismiss the proceeding. The motion to dismiss was granted by the FERC on January 22, 2004.
Certain parties have sought rehearing of this order, and that request is pending. 106




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS California Civil Energy Market LitigationThe State of California and others have filed
various claims, which have now been consolidated, against several power suppliers to California
alleging antitrust violations. Wholesale Electricity Antitrust Cases I and II, Superior
Court in and for the County of San Diego, Proceedings Nos. 4204-00005 and 4204-00006. Two of the
suppliers who were named as defendants in those matters, Reliant Energy Services, Inc. (and other
Reliant entities) and Duke Energy and Trading, LLP (and other Duke entities), filed cross-claims
against various other participants in the PX and California independent system operator markets,
including APS, attempting to expand those matters to such other participants. APS has not yet
filed a responsive pleading in the matter, but APS believes the claims by Reliant and Duke as they
relate to APS are without merit. APS was also named in a lawsuit regarding wholesale contracts in California, which, after
moving to state court, has been removed to the federal court for a second time. James Millar,
et al. v. Allegheny Energy Supply, et al., San Francisco Superior Court, Case No. 407867, U.S.
District Court (Northern District) C-04-0519 SBA. The First Amended Complaint alleges basically
that the contracts entered into were the result of an unfair and unreasonable market, in violation
of California unfair competition laws. The PX has filed a lawsuit against the State of California
regarding the seizure of forward contracts and the State has filed a cross complaint against APS
and numerous other PX participants. Cal PX v. The State of California, Superior Court in
and for the County of Sacramento, JCCP No. 4203. Various motions continue to be filed, and we
currently believe these claims will have no material adverse impact on our financial position,
results of operations or liquidity. Construction Program Consolidated capital expenditures in 2005 are estimated to be (dollars in millions): APS
    
    $
    772Pinnacle West Energy
    
    
    7SunCor
    
    
    114Other
    
    
    8Total
    
    $
    901
 Natural Gas Supply Pursuant to the terms of a comprehensive settlement entered into in 1996 with El Paso Natural
Gas Company, the rates charged for natural gas transportation are subject to a rate moratorium
through December 31, 2005. On July 9, 2003 the FERC issued an order that altered the capacity rights of parties to the
1996 settlement but maintained the cost responsibility provisions agreed to by parties to that
settlement. The D.C. Court of Appeals recently upheld the FERCs authority to alter the capacity rights
of parties to the settlement. With respect to the FERCs authority to maintain the cost responsibility
provisions of the settlement, a party has sought appellate review and is seeking to reallocate the
costs responsibility associated with the changed contractual obligations in a way that would be
less favorable to APS and Pinnacle West Energy than under the FERCs July 9, 2003 order. Should this
party prevail on this point, APS and Pinnacle West Energys annual capacity cost could be increased
by approximately $3 million per year, from September 2003 through December 2005. 107




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS El Paso is required under the terms of the 1996 settlement to file a new rate case by July 1,
2005, with new rates to become effective on January 1, 2006. APS cannot currently assess the
financial impact that El Pasos filing could have on rates. Navajo Nation Litigation In June 1999, the Navajo Nation served Salt River Project with a lawsuit naming Salt River
Project, several Peabody Coal Company entities (collectively, Peabody), Southern California
Edison Company and other defendants, and citing various claims in connection with the
renegotiations of the coal royalty and lease agreements under which Peabody mines coal for the
Navajo Generating Station and the Mohave Generating Station. The Navajo Nation v. Peabody
Holding Company, Inc., et al., United States District Court for the District of Columbia,
CA-99-0469-EGS (the D.C. Lawsuit). APS is a 14% owner of the Navajo Generating Station, which
Salt River Project operates. The D.C. Lawsuit alleges, among other things, that the defendants
obtained a favorable coal royalty rate by improperly influencing the outcome of a federal
administrative process under which the royalty rate was to be adjusted. The suit seeks $600
million in damages, treble damages, punitive damages of not less than $1 billion, and the ejection
of defendants from all possessory interests and Navajo Tribal lands arising out of the [primary
coal lease]. In July 2001, the court dismissed all claims against Salt River Project. In January, 2005, Peabody served APS with a lawsuit naming APS and the other Navajo Generating
Station participants and seeking, among other things, a declaration that the participants are
obligated to reimburse Peabody for any royalty, tax, or other obligation arising out of the D.C.
Lawsuit. Peabody Western Coal Company v. Salt River Project Agricultural Improvement and
Power District, et al., Circuit Court for the City of St. Louis, Division No. 1, Cause No.
042-08561. Based on APS ownership interest in the Navajo Generating Station, APS could be liable
for up to 14% of any such obligation. Because the litigation is in preliminary stages, APS cannot
currently predict the outcome of this matter. Litigation We are party to various other claims, legal actions and complaints arising in the ordinary
course of business, including but not limited to environmental matters related to the Clean Air
Act, Navajo Nation issues and EPA and ADEQ issues. In our opinion, the ultimate resolution of
these matters will not have a material adverse effect on our financial position, results of
operations or liquidity. 12. Asset Retirement Obligations APS has asset retirement obligations for its Palo Verde nuclear facilities and certain other
generation, transmission and distribution assets. The Palo Verde asset retirement obligation
primarily relates to final plant decommissioning. This obligation is based on the NRCs
requirements for disposal of radiated property or plant and agreements APS reached with the ACC for
final decommissioning of the plant. The non-nuclear generation asset retirement obligations
primarily relate to requirements for removing portions of those plants at the end of the plant life
or lease term. Some of APS transmission and distribution assets have asset retirement obligations
because they are subject to right of way and easement agreements that require final removal. These
agreements have a history of uninterrupted renewal that APS expects to continue. As a result, APS
cannot reasonably estimate the fair value of the asset retirement obligation related to such
distribution and transmission assets. The asset retirement obligations associated with our
non-regulated assets are immaterial. To fund the costs APS expects to incur to decommission Palo Verde, APS established external
decommissioning trusts in accordance with NRC regulations. APS invests the trust funds in fixed
income and domestic equity securities and classifies them as available for sale. The following
table shows the cost and fair value of APS nuclear decommissioning trust fund assets which are on
the Consolidated Balance Sheets at December 31, 2004 and December 31, 2003 (dollars in millions): December 31,
    
    
    December 31,2004
    
    
    2003Trust fund assets  at costFixed income securities
    
    $
    134
    
    
    $
    124Domestic stock
    
    
    83
    
    
    
    74Total
    
    $
    217
    
    
    $
    198Trust fund assets  at fair valueFixed income securities
    
    $
    150
    
    
    $
    140Domestic stock
    
    
    118
    
    
    
    101Total
    
    $
    268
    
    
    $
    241
 108




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following schedule shows the change in our asset retirement obligations during the years
ended December 31, 2004 and 2003 (dollars in millions): 2004
    
    
    2003At beginning of year
    
    $
    234
    
    
    $
    219Changes attributable to:Liabilities incurred
    
    
    
    
    
    
    Liabilities settled
    
    
    (1
    )
    
    
    Accretion expense
    
    
    17
    
    
    
    15Estimated cash flow revisions
    
    
    2
    
    
    
    At end of year
    
    $
    252
    
    
    $
    234
 In accordance with SFAS No. 71, APS accrues for removal costs for its regulated assets, even
if there is no legal obligation for removal. At December 31, 2004, regulatory liabilities shown on
Pinnacle Wests Consolidated Balance Sheets included approximately $462 million of estimated future
removal costs that are not considered legal obligations. 109




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. Selected Quarterly Financial Data (Unaudited) The following note presents quarterly financial information for 2004 and 2003. We are
disclosing originally reported amounts and revised amounts in the first and second quarters of 2004
due to the adoption of FSP 106-2, which was implemented on June 30, 2004 (see Note 8) and in each
period for the reclassification of NAC as discontinued operations (see Note 22). Consolidated quarterly financial information for 2004 and 2003 is as follows (dollars in
thousands, except per share amounts): 2004 Quarter Ended
    
    
    2004March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    TotalAs originally reported:Operating Revenues
    
    $
    574,369
    
    
    $
    722,686
    
    
    $
    886,779
    
    
    $
    734,718
    
    
    $
    2,918,552Operations and Maintenance
    
    
    138,656
    
    
    
    140,245
    
    
    
    160,765
    
    
    
    159,431
    
    
    
    599,097Operating Income
    
    
    83,371
    
    
    
    121,160
    
    
    
    210,836
    
    
    
    90,745
    
    
    
    506,112Income Taxes
    
    
    15,627
    
    
    
    44,027
    
    
    
    58,900
    
    
    
    11,283
    
    
    
    129,837Income From Continuing
Operations
    
    
    29,768
    
    
    
    71,057
    
    
    
    103,886
    
    
    
    29,318
    
    
    
    234,029Net Income (a)
    
    
    30,156
    
    
    
    71,370
    
    
    
    105,400
    
    
    
    33,729
    
    
    
    240,655NAC Reclassifications
(see Note 22):Operating Revenues
    
    
    (8,024
    )
    
    
    (10,803
    )
    
    
    
    
    
    
    
    
    
    
    (18,827
    )Operating Income
    
    
    (443
    )
    
    
    (1,950
    )
    
    
    
    
    
    
    
    
    
    
    (2,393
    )Income Taxes
    
    
    (159
    )
    
    
    (821
    )
    
    
    
    
    
    
    
    
    
    
    (980
    )Income From Continuing
Operations
    
    
    (247
    )
    
    
    (1,104
    )
    
    
    
    
    
    
    
    
    
    
    (1,351
    )Medicare Subsidy Adoption
(See Note 8):Operations and Maintenance
    
    
    (1,270
    )
    
    
    (1,270
    )
    
    
    
    
    
    
    
    
    
    
    (2,540
    )Operating Income
    
    
    1,270
    
    
    
    1,270
    
    
    
    
    
    
    
    
    
    
    
    2,540Income from Continuing
Operations
    
    
    1,270
    
    
    
    1,270
    
    
    
    
    
    
    
    
    
    
    
    2,540Net Income
    
    
    1,270
    
    
    
    1,270
    
    
    
    
    
    
    
    
    
    
    
    2,540After NAC
Reclassifications
and Medicare Subsidy
Adoption:Operating Revenues
    
    
    566,345
    
    
    
    711,883
    
    
    
    886,779
    
    
    
    734,718
    
    
    
    2,899,725Operations and Maintenance
    
    
    137,386
    
    
    
    138,975
    
    
    
    160,765
    
    
    
    159,431
    
    
    
    596,557Operating Income
    
    
    84,198
    
    
    
    120,480
    
    
    
    210,836
    
    
    
    90,745
    
    
    
    506,259Income Taxes
    
    
    15,468
    
    
    
    43,206
    
    
    
    58,900
    
    
    
    11,283
    
    
    
    128,857Income From Continuing
Operations
    
    
    30,791
    
    
    
    71,223
    
    
    
    103,886
    
    
    
    29,318
    
    
    
    235,218Net Income (a) (b)
    
    
    31,426
    
    
    
    72,640
    
    
    
    105,400
    
    
    
    33,729
    
    
    
    243,195
 110




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2003 Quarter Ended
    
    
    2003March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    TotalAs originally reported:Operating Revenues
    
    $
    552,643
    
    
    $
    683,302
    
    
    $
    847,703
    
    
    $
    734,204
    
    
    $
    2,817,852Operating Income
    
    
    69,255
    
    
    
    132,482
    
    
    
    198,850
    
    
    
    81,466
    
    
    
    482,053Income Taxes
    
    
    12,754
    
    
    
    35,248
    
    
    
    50,528
    
    
    
    7,030
    
    
    
    105,560Income From Continuing
Operations
    
    
    20,153
    
    
    
    54,889
    
    
    
    109,538
    
    
    
    45,996
    
    
    
    230,576Net Income (a)
    
    
    25,298
    
    
    
    56,142
    
    
    
    110,048
    
    
    
    49,091
    
    
    
    240,579NAC reclassifications
(see Note 22):Operating Revenues
    
    
    (11,382
    )
    
    
    (19,637
    )
    
    
    (16,701
    )
    
    
    (10,638
    )
    
    
    (58,358
    )Operating Income
    
    
    (3,675
    )
    
    
    (1,347
    )
    
    
    (1,489
    )
    
    
    (1,600
    )
    
    
    (8,111
    )Income Taxes
    
    
    (1,402
    )
    
    
    (507
    )
    
    
    (567
    )
    
    
    (611
    )
    
    
    (3,087
    )Income From Continuing
Operations
    
    
    (2,167
    )
    
    
    (783
    )
    
    
    (878
    )
    
    
    (945
    )
    
    
    (4,773
    )Reclassified:Operating Revenues
    
    
    541,261
    
    
    
    663,665
    
    
    
    831,002
    
    
    
    723,566
    
    
    
    2,759,494Operating Income
    
    
    65,580
    
    
    
    131,135
    
    
    
    197,361
    
    
    
    79,866
    
    
    
    473,942Income Taxes
    
    
    11,352
    
    
    
    34,741
    
    
    
    49,961
    
    
    
    6,419
    
    
    
    102,473Income From Continuing
Operations
    
    
    17,986
    
    
    
    54,106
    
    
    
    108,660
    
    
    
    45,051
    
    
    
    225,803Net Income (a) (b)
    
    
    25,298
    
    
    
    56,142
    
    
    
    110,048
    
    
    
    49,091
    
    
    
    240,579
   (a)
    
    Includes income from discontinued operations at SunCor (see Note 22).(b)
    
    Includes income (loss) from NACs discontinued operations (see Note 22). 111




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings per share: 2004 Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,As originally reported  Basic earnings per share (a):Income From Continuing Operations
    
    $
    0.33
    
    
    $
    0.78
    
    
    $
    1.14
    
    
    $
    0.32Net Income
    
    
    0.33
    
    
    
    0.78
    
    
    
    1.15
    
    
    
    0.37After NAC reclassification and Medicare subsidy
adoption  Basic earnings per share (a):Income from Continuing Operations
    
    
    0.34
    
    
    
    0.78
    
    
    
    1.14
    
    
    
    0.32Net Income
    
    
    0.34
    
    
    
    0.80
    
    
    
    1.15
    
    
    
    0.37As originally reported  Diluted earnings per
share (a):Income From Continuing Operations
    
    
    0.33
    
    
    
    0.78
    
    
    
    1.14
    
    
    
    0.32Net Income
    
    
    0.33
    
    
    
    0.78
    
    
    
    1.15
    
    
    
    0.37After NAC reclassification and Medicare subsidy
adoption  Diluted earnings per share (a):Income From Continued Operations
    
    
    0.34
    
    
    
    0.78
    
    
    
    1.14
    
    
    
    0.32Net Income
    
    
    0.34
    
    
    
    0.79
    
    
    
    1.15
    
    
    
    0.37
 2003 Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,As originally reported  Basic earnings per share (b):Income From Continuing Operations
    
    $
    0.22
    
    
    $
    0.60
    
    
    $
    1.20
    
    
    $
    0.50Net Income
    
    
    0.28
    
    
    
    0.62
    
    
    
    1.21
    
    
    
    0.54Reclassified  Basic earnings per share (b):Income from Continuing Operations
    
    
    0.20
    
    
    
    0.59
    
    
    
    1.19
    
    
    
    0.49Net Income
    
    
    0.28
    
    
    
    0.62
    
    
    
    1.21
    
    
    
    0.54As originally reported  Diluted earnings per
share (b):Income From Continuing Operations
    
    
    0.22
    
    
    
    0.60
    
    
    
    1.20
    
    
    
    0.50Net Income
    
    
    0.28
    
    
    
    0.61
    
    
    
    1.20
    
    
    
    0.54Reclassified  Diluted earnings per share (b):Income From Continued Operations
    
    
    0.20
    
    
    
    0.59
    
    
    
    1.19
    
    
    
    0.49Net Income
    
    
    0.28
    
    
    
    0.61
    
    
    
    1.20
    
    
    
    0.54
   (a)
    
    The difference between originally reported and revised basic and diluted earnings per
share related to the sale of NAC (see Note 22) and the adoption of the Medicare subsidy, which
changed reported amounts for the first and second quarter of 2004 (See Note 8). The earnings
per share impact from the sale of NAC or the adoption of the Medicare subsidy did not change
earnings per share by more than $0.02 in any given quarter in 2004.(b)
    
    The difference between originally reported and reclassified basic and diluted earnings per
share for income from continuing operations related to the sale of NAC (see Note 22). The
earnings per share impact from the sale of NAC did not change earnings per share by more than
$0.02 in any given quarter in 2003. 112




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Fair Value of Financial Instruments We believe that the carrying amounts of our cash equivalents are reasonable estimates of their
fair values at December 31, 2004 and 2003 due to their short maturities. We hold investments in debt securities for purposes other than trading. We believe that the
carrying amounts of these investments represent reasonable estimates of their fair values at December 31,
2004 and 2003 due to the short-term reset of interest rates. We also hold investments in fixed income and domestic equity securities for purposes other
than trading. The December 31, 2004 and 2003 fair values of such investments, which we determine
by using quoted market prices, approximate their carrying amount. For further information, see
disclosure of cost and fair value of APS nuclear decommissioning trust fund assets in Note 12. On December 31, 2004, the carrying value of our long-term debt (excluding capitalized lease
obligations) was $3.19 billion, with an estimated fair value of $3.30 billion. The carrying value
of our long-term debt (excluding capitalized lease obligations) was $3.31 billion on December 31,
2003, with an estimated fair value of $3.46 billion. The fair value estimates are based on quoted
market prices of the same or similar issues. 15. Earnings Per Share The following table presents earnings per weighted average common share outstanding for the
years ended December 31, 2004, 2003 and 2002: 2004
    
    
    2003
    
    
    2002Basic earnings per share:Income from continuing operations
    
    $
    2.57
    
    
    $
    2.47
    
    
    $
    2.79Income (loss) from discontinued
operations
    
    
    0.09
    
    
    
    0.17
    
    
    
    (0.26
    )Cumulative effect of change in
accounting
    
    
    
    
    
    
    
    
    
    
    (0.77
    )Earnings per share  basic
    
    $
    2.66
    
    
    $
    2.64
    
    
    $
    1.76Diluted earnings per share:Income from continuing operations
    
    $
    2.57
    
    
    $
    2.47
    
    
    $
    2.78Income (loss) from discontinued
operations
    
    
    0.09
    
    
    
    0.16
    
    
    
    (0.25
    )Cumulative effect of change in
accounting
    
    
    
    
    
    
    
    
    
    
    (0.77
    )Earnings per share  diluted
    
    $
    2.66
    
    
    $
    2.63
    
    
    $
    1.76
 Dilutive stock options increased average common shares outstanding by approximately 135,000
shares in 2004, 140,000 shares in 2003 and 61,000 shares in 2002. Total average common shares
outstanding for the purposes of calculating diluted earnings per share were 91,532,473 shares in
2004, 91,405,134 shares in 2003 and 84,963,921 shares in 2002. 113




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Options to purchase 1,058,616 shares of common stock were outstanding at December 31, 2004 but
were not included in the computation of diluted earnings per share because the options exercise
price was greater than the average market price of the common shares. Options to purchase shares
of common stock that were not included in the computation of diluted earnings per share were
2,291,646 at December 31, 2003 and 1,629,958 at December 31, 2002. 16. Stock-Based Compensation Pinnacle West offers stock-based compensation plans for officers and key employees of the
Company and our subsidiaries. In May 2002, shareholders approved the 2002 Long-Term Incentive Plan (2002 plan), which allows
Pinnacle West to grant performance shares, stock ownership incentive awards and non-qualified and
performance-accelerated stock options to key employees. The Company has reserved 6 million shares
of common stock for issuance under the 2002 plan. No more than 1.8 million shares may be issued in
relation to performance share awards and stock ownership incentive awards. The plan also provides
for the granting of new non-qualified stock options at a price per share not less than the fair
market value of the common stock at the time of grant. The stock options vest over three years,
unless certain performance criteria are met, which can accelerate the vesting period. The term of
the option cannot be longer than 10 years and the option cannot be repriced during its term. The 1994 plan includes outstanding options but no new options will be granted under the plan.
Options vested one-third of the grant per year beginning one year after the date the option is
granted and expire ten years from the date of the grant. The 1994 plan also provided for the
granting of any combination of shares of restricted stock, stock appreciation rights or dividend
equivalents. In the third quarter of 2002, we began applying the fair value method of accounting for
stock-based compensation, as provided for in SFAS No. 123. The fair value method of accounting is
the preferred method. In accordance with the transition requirements of SFAS No. 123, we applied
the fair value method prospectively, beginning with 2002 stock grants. In prior years, we
recognized stock compensation expense based on the intrinsic value method allowed in APB No. 25. In addition, see Note 2 for discussion of a new standard on share based payments (SFAS No.
123R). Total stock-based compensation cost, including restricted stock, performance shares, stock
options, and stock ownership incentives was $8 million in 2004, $6 million in 2003 and $5 million
in 2002 for Pinnacle West, and $6 million in 2004, $3 million in 2003 and $3 million in 2002 for
APS. The following table is a summary of the status of outstanding stock options under our equity
incentive plans as of December 31, 2004, 2003 and 2002 and changes during the years ending on those
dates: 114




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average2004
    
    
    Exercise
    
    
    2003
    
    
    Exercise
    
    
    2002
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at
beginning of
year
    
    
    2,698,246
    
    
    $
    38.56
    
    
    
    2,185,129
    
    
    $
    39.96
    
    
    
    1,832,725
    
    
    $
    39.52Granted
    
    
    37,580
    
    
    
    37.85
    
    
    
    621,875
    
    
    
    32.29
    
    
    
    603,900
    
    
    
    38.37Exercised
    
    
    (372,205
    )
    
    
    34.02
    
    
    
    (62,366
    )
    
    
    26.09
    
    
    
    (163,381
    )
    
    
    28.25Forfeited
    
    
    (87,498
    )
    
    
    42.31
    
    
    
    (46,392
    )
    
    
    37.61
    
    
    
    (88,115
    )
    
    
    41.54Outstanding at end
of year
    
    
    2,276,123
    
    
    
    39.14
    
    
    
    2,698,246
    
    
    
    38.56
    
    
    
    2,185,129
    
    
    
    39.96Options
exercisable
at year-end
    
    
    1,859,340
    
    
    
    40.59
    
    
    
    1,787,622
    
    
    
    40.35
    
    
    
    1,155,357
    
    
    
    39.66Weighted average
fair value of
options granted
during the year
    
    
    
    
    
    $
    3.53
    
    
    
    
    
    
    $
    7.37
    
    
    
    
    
    
    $
    6.16
 The following table summarizes information about our stock options at December 31, 2004: WeightedWeighted
    
    
    Average
    
    
    
    
    
    
    WeightedAverage
    
    
    Remaining
    
    
    
    
    
    
    AverageExercise
    
    Options
    
    
    Exercise
    
    
    Contract
    
    
    Options
    
    
    ExercisePrices Per Share
    
    Outstanding
    
    
    Price
    
    
    Life (Years)
    
    
    Exercisable
    
    
    Price$23.39  28.07
    
    
    4,750
    
    
    $
    27.44
    
    
    
    0.5
    
    
    
    4,750
    
    
    $
    27.4428.07  32.75
    
    
    515,344
    
    
    
    32.24
    
    
    
    7.8
    
    
    
    129,706
    
    
    
    32.1032.75  37.42
    
    
    138,863
    
    
    
    34.72
    
    
    
    4.4
    
    
    
    138,863
    
    
    
    34.7237.42  42.10
    
    
    693,482
    
    
    
    38.83
    
    
    
    5.9
    
    
    
    662,337
    
    
    
    38.8742.10  46.78
    
    
    923,684
    
    
    
    43.95
    
    
    
    5.4
    
    
    
    923,684
    
    
    
    43.952,276,123
    
    
    
    
    
    
    
    
    
    
    
    1,859,340
 The following table is a summary of the amount and weighted-average grant date fair value of
stock compensation awards granted, other than options, during the years ended December 31, 2004,
2003 and 2002: 2004
    
    
    2004 Grant
    
    
    2003
    
    
    2003 Grant
    
    
    2002
    
    
    2002 GrantShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceRestricted stock
    
    
    4,000
    
    
    $
    37.68
    (a)
    
    
    4,000
    
    
    $
    32.20
    (a)
    
    
    6,000
    
    
    $
    38.84
    (a)Performance share
awards
    
    
    215,285
    
    
    
    37.85
    (b)
    
    
    119,085
    
    
    
    32.29
    (b)
    
    
    115,975
    
    
    
    38.37
    (b)Stock
ownership incentive awards
    
    
    9,015
    
    
    
    40.29
    (c)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (a)
    
    Restricted stock priced at the average of the high and low market price on the
grant date. 115




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (b)
    
    Performance shares priced at the closing market price on the grant date.  (c)
    
    Shares are based on estimated ownership of
Pinnacle West common stock. 17. Business Segments We have three principal business segments (determined by products, services and the regulatory
environment):  
    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;  
    our marketing and trading segment, which consists of our competitive energy business
activities, including wholesale marketing and trading and APS Energy Services
commodity-related energy services; and  
    our real estate segment, which consists of SunCors real estate development and
investment activities. In 2004, our other segment includes a $35 million gain ($21 million after-tax) related to the
sale of El Dorados limited partnership interest in the Phoenix Suns. The other segment also
includes activity related to APS Energy Services non-commodity trading activities, as well as the
parent company and other subsidiaries. Financial data for the years ended December 31, 2004, 2003 and 2002 by business segments is
provided as follows (dollars in millions): Business Segments for the Year Ended December 31, 2004MarketingRegulated
    
    
    andElectricity
    
    
    Trading
    
    
    Real Estate
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    2,035
    
    
    $
    462
    
    
    $
    360
    
    
    $
    43
    
    
    $
    2,900Purchased power and fuel costs
    
    
    568
    
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    950Other operating expenses
    
    
    685
    
    
    
    34
    
    
    
    290
    
    
    
    34
    
    
    
    1,043Operating margin
    
    
    782
    
    
    
    46
    
    
    
    70
    
    
    
    9
    
    
    
    907Depreciation and amortization
    
    
    384
    
    
    
    11
    
    
    
    6
    
    
    
    
    
    
    
    401Interest expense
    
    
    169
    
    
    
    8
    
    
    
    2
    
    
    
    
    
    
    
    179Other expense/(income)
    
    
    4
    
    
    
    (2
    )
    
    
    (5
    )
    
    
    (34
    )
    
    
    (37
    )Pretax margin
    
    
    225
    
    
    
    29
    
    
    
    67
    
    
    
    43
    
    
    
    364Income taxes
    
    
    74
    
    
    
    11
    
    
    
    27
    
    
    
    17
    
    
    
    129Income from continuing
operations
    
    
    151
    
    
    
    18
    
    
    
    40
    
    
    
    26
    
    
    
    235Income from discontinued
operations  net of income
taxes of $5 (see Note 22)
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4
    
    
    
    8Net income
    
    $
    151
    
    
    $
    18
    
    
    $
    44
    
    
    $
    30
    
    
    $
    243Total assets
    
    $
    8,674
    
    
    $
    746
    
    
    $
    454
    
    
    $
    23
    
    
    $
    9,897Capital expenditures
    
    $
    483
    
    
    $
    34
    
    
    $
    81
    
    
    $
    
    
    
    $
    598
 116




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Business Segments for the Year Ended December 31, 2003MarketingRegulated
    
    
    andElectricity
    
    
    Trading
    
    
    Real Estate
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    1,978
    
    
    $
    392
    
    
    $
    362
    
    
    $
    27
    
    
    $
    2,759Purchased power and fuel costs
    
    
    517
    
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    862Other operating expenses
    
    
    625
    
    
    
    34
    
    
    
    306
    
    
    
    23
    
    
    
    988Operating margin
    
    
    836
    
    
    
    13
    
    
    
    56
    
    
    
    4
    
    
    
    909Depreciation and amortization
    
    
    428
    
    
    
    1
    
    
    
    6
    
    
    
    
    
    
    
    435Interest expense
    
    
    172
    
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    175Other expense/(income)
    
    
    (4
    )
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (29
    )Pretax margin
    
    
    240
    
    
    
    12
    
    
    
    73
    
    
    
    3
    
    
    
    328Income taxes
    
    
    70
    
    
    
    3
    
    
    
    28
    
    
    
    1
    
    
    
    102Income from continuing
operations
    
    
    170
    
    
    
    9
    
    
    
    45
    
    
    
    2
    
    
    
    226Income from discontinued
operations  net of income
taxes of $10 (see Note 22)
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    5
    
    
    
    15Net income
    
    $
    170
    
    
    $
    9
    
    
    $
    55
    
    
    $
    7
    
    
    $
    241Total assets
    
    $
    8,373
    
    
    $
    680
    
    
    $
    439
    
    
    $
    27
    
    
    $
    9,519Capital expenditures
    
    $
    686
    
    
    $
    9
    
    
    $
    72
    
    
    $
    
    
    
    $
    767
 Business Segments for the Year Ended December 31, 2002MarketingRegulated
    
    
    andElectricity
    
    
    Trading
    
    
    Real Estate
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    1,890
    
    
    $
    287
    
    
    $
    201
    
    
    $
    27
    
    
    $
    2,405Purchased power and fuel costs
    
    
    377
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    532Other operating expenses
    
    
    659
    
    
    
    34
    
    
    
    185
    
    
    
    22
    
    
    
    900Operating margin
    
    
    854
    
    
    
    98
    
    
    
    16
    
    
    
    5
    
    
    
    973Depreciation and amortization
    
    
    416
    
    
    
    2
    
    
    
    4
    
    
    
    
    
    
    
    422Interest expense
    
    
    141
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    143Other expense/(income)
    
    
    19
    
    
    
    
    
    
    
    (7
    )
    
    
    7
    
    
    
    19Pretax margin
    
    
    278
    
    
    
    96
    
    
    
    17
    
    
    
    (2
    )
    
    
    389Income taxes
    
    
    108
    
    
    
    38
    
    
    
    7
    
    
    
    (1
    )
    
    
    152Income (loss) from continuing
operations
    
    
    170
    
    
    
    58
    
    
    
    10
    
    
    
    (1
    )
    
    
    237Income (loss) from discontinued
operations  net of income
taxes of $14 (see Note 22)
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    (31
    )
    
    
    (22
    )Cumulative effect of change in
accounting for trading
activities
 net of income taxes of $43
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    
    
    
    
    (66
    )Net income (loss)
    
    $
    170
    
    
    $
    (8
    )
    
    $
    19
    
    
    $
    (32
    )
    
    $
    149Capital expenditures
    
    $
    893
    
    
    $
    19
    
    
    $
    72
    
    
    $
    
    
    
    $
    984
 117




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Derivative and Energy Trading Accounting We are exposed to the impact of market fluctuations in the commodity price and transportation
costs of electricity, natural gas, coal, emissions allowances and in interest rates. We manage
risks associated with these market fluctuations by utilizing various instruments that qualify as
derivatives, including exchange-traded futures and options and over-the-counter forwards, options
and swaps. As part of our overall risk management program, we use such instruments to hedge our
exposure to changes in interest rates and to hedge purchases and sales of electricity, fuels, and
emissions allowances and credits. As of December 31, 2004, we hedged exposures to the price
variability of the commodities for a maximum of eight years. The changes in market value of such
contracts have a high correlation to price changes in the hedged transactions. In addition,
subject to specified risk parameters monitored by the ERMC, we engage in marketing and trading
activities intended to profit from market price movements. We recognize all derivatives, except those which receive a scope exception, as either assets
or liabilities on the balance sheet and measure those instruments at fair value in accordance with
SFAS No. 133, as amended by SFAS No. 149. Derivative commodity contracts for the physical delivery
of purchase and sale quantities transacted in the normal course of business receive the normal
purchase and sales exception and are accounted for under the accrual method of accounting. Changes in
the fair value of derivative instruments are recognized periodically in income unless certain hedge
criteria are met. For cash flow hedges, changes in the fair value of the derivative are recognized
in common stock equity (as a component of other comprehensive income (loss)). 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. We use cash flow hedges to limit
our exposure to cash flow variability on forecasted transactions. We use fair value hedges to
limit our exposure to changes in fair value of an asset or liability. We assess hedge effectiveness both at inception and on a continuing basis. Hedge
effectiveness is related to the degree to which the derivative contract and the hedged item are
correlated. It is measured based on the relative changes in fair value between the derivative
contract and the hedged item over time. We exclude the time value of certain options from our
assessment of hedge effectiveness. Any change in the fair value resulting from ineffectiveness, or
the amount by which the derivative contract and the hedged commodity are not directly correlated,
is recognized immediately in net income. Both non-trading and trading derivatives that do not receive a scope exception are classified
as assets and liabilities from risk management and trading activities on the Consolidated Balance
Sheets. Certain of our non-trading derivatives qualify for cash flow hedge accounting treatment.
Non-trading derivatives, or any portion thereof that are not effective hedges, are adjusted to fair
value through income. Gains and losses related to non-trading derivatives that qualify as cash
flow hedges of expected transactions are recognized in revenue or purchased power and fuel expense
as an offset to the related item being hedged when the underlying hedged physical transaction
impacts earnings. If it becomes probable that a forecasted transaction will not occur, we
discontinue the use of hedge accounting and recognize in income the unrealized gains and losses
that were previously recorded in other comprehensive income (loss). In the event a non-trading
derivative is terminated or settled, the unrealized gains and losses remain in other comprehensive
income (loss), and are recognized in income when the underlying transaction impacts earnings. 118




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS All gains and losses (realized and unrealized) on trading contracts that qualify as
derivatives are included in marketing and trading segment revenues on the Consolidated Statements
of Income on a net basis. Trading contracts that do not meet the definition of a derivative are
accounted for on an accrual basis with the associated revenues and costs recorded at the time the
contracted commodities are delivered or received. In the electricity business, some contracts to purchase energy are netted against other
contracts to sell energy. This is called book-out and usually occurs in contracts that have the
same terms (quantities and delivery points) and for which power does not flow. We net these
book-outs, which reduces both revenues and purchased power and fuel costs in our Consolidated
Statement of Income, but this does not impact our financial condition, net income or cash flows. In November 2003, the FASB revised its derivative guidance in DIG Issue No. C15, Normal
Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in
Electricity. Effective January 1, 2004, the new guidance changed the criteria for the normal
purchases and sales scope exception for electricity contracts. The implementation of this guidance
did not have a material impact on our consolidated financial statements. During 2002, the EITF discussed EITF 02-3 and reached a consensus on certain issues. EITF
02-3 rescinded EITF 98-10 and was effective October 25, 2002 for any new contracts, and on January
1, 2003 for existing contracts, with early adoption permitted. We adopted the EITF 02-3 guidance
for all contracts in the fourth quarter of 2002. We recorded a $66 million after-tax charge in net
income as a cumulative effect adjustment for the previously recorded accumulated unrealized
mark-to-market on energy trading contracts that did not meet the accounting definition of a
derivative. Cash Flow Hedges The changes in the fair value of our hedged positions included in the Consolidated Statements
of Income for the years ended December 31, 2004, 2003 and 2002 are comprised of the following
(dollars in thousands): 2004
    
    
    2003
    
    
    2002Gains/(losses) on the ineffective portion
of derivatives qualifying for hedge
accounting
    
    $
    (1,568
    )
    
    $
    8,237
    
    
    $
    9,763Gains/(losses) from the change in options
time value excluded from measurement
of effectiveness
    
    
    185
    
    
    
    181
    
    
    
    (2,484
    )Gains from the discontinuance of
cash flow hedges
    
    
    1,137
    
    
    
    
    
    
    
    386
 During the twelve months ending December 31, 2005, we estimate that a net gain of $44 million
before income taxes will be reclassified from accumulated other comprehensive loss as an offset to
the effect on earnings of market price changes for the related hedged transactions. 119




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our assets and liabilities from risk management and trading activities are presented in two
categories, consistent with our business segments:  
    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  both non-trading and trading derivative instruments of our
competitive business segment. The following table summarizes our assets and liabilities from risk management and trading
activities at December 31, 2004 and 2003 (dollars in thousands): December 31, 2004 Current
    
    
    
    
    
    
    Current
    
    
    Other
    
    
    Net Asset/Assets
    
    
    Investments
    
    
    Liabilities
    
    
    Liabilities
    
    
    (Liability)Regulated electricity:Mark-to-market
    
    $
    45,220
    
    
    $
    19,417
    
    
    $
    (19,191
    )
    
    $
    (12,000
    )
    
    $
    33,446Options and
margin account
    
    
    18,821
    
    
    
    118
    
    
    
    (8,879
    )
    
    
    
    
    
    
    10,060Marketing
and trading:Mark-to-market
    
    
    102,855
    
    
    
    204,512
    
    
    
    (68,008
    )
    
    
    (132,683
    )
    
    
    106,676Emission
allowances
 at cost and
margin account
    
    
    
    
    
    
    294
    
    
    
    (17,328
    )
    
    
    (11,579
    )
    
    
    (28,613
    )Total
    
    $
    166,896
    
    
    $
    224,341
    
    
    $
    (113,406
    )
    
    $
    (156,262
    )
    
    $
    121,569
 December 31, 2003 Current
    
    
    
    
    
    
    Current
    
    
    Other
    
    
    Net Asset/Assets
    
    
    Investments
    
    
    Liabilities
    
    
    Liabilities
    
    
    (Liability)Regulated electricity:Mark-to-market
    
    $
    44,079
    
    
    $
    5,900
    
    
    $
    (47,268
    )
    
    $
    (3,028
    )
    
    $
    (317
    )Options
    
    
    
    
    
    
    12,101
    
    
    
    
    
    
    
    
    
    
    
    12,101Marketing
and trading:Mark-to-market
    
    
    53,551
    
    
    
    116,363
    
    
    
    (37,023
    )
    
    
    (63,398
    )
    
    
    69,493Emission
allowances
 at cost
    
    
    
    
    
    
    4,582
    
    
    
    (8,464
    )
    
    
    (16,304
    )
    
    
    (20,186
    )Total
    
    $
    97,630
    
    
    $
    138,946
    
    
    $
    (92,755
    )
    
    $
    (82,730
    )
    
    $
    61,091
 Cash or other assets may be required to serve as collateral against our open positions on
certain energy-related contracts. Collateral provided to counterparties is $1 million at December
31, 2004 and $1 million at December 31, 2003, and is included in other current assets on the
Consolidated Balance Sheet. Collateral provided to us by counterparties is $18 million at 120




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and $12 million at December 31, 2003, and is included in other current
liabilities on the Consolidated Balance Sheet. Fair Value Hedges On January 29, 2004, we entered into two fixed-for-floating interest rate swap transactions on
our $300 million 6.4% Senior Notes. The purpose of these hedges is to protect against significant
fluctuations in the fair value of our debt. Our interest rate swaps are considered to be fully
effective with any resulting gains or losses on the derivative offset by a similar loss or gain
amount on the underlying fair value of debt. The fair value of the interest rate swaps was $2.6
million at December 31, 2004 and is included in investments and
other assets with the corresponding offset in
long-term debt less current maturities on the Consolidated Balance Sheets. Credit Risk We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We
have risk management and trading contracts with many counterparties, including two counterparties
for which a worst case exposure represents approximately 35% of Pinnacle Wests $391 million of
risk management and trading assets as of December 31, 2004. Our risk management process assesses
and monitors the financial exposure of these and all other counterparties. Despite the fact that
the great majority of trading counterparties are rated as investment grade by the credit rating
agencies, including the counterparties noted above, there is still a possibility that one or more
of these companies could default, resulting in a material impact on consolidated earnings for a
given period. Counterparties in the portfolio consist principally of major energy companies,
municipalities, local distribution companies and financial institutions. We maintain credit
policies that we believe minimize overall credit risk to within acceptable limits. Determination
of the credit quality of our counterparties is based upon a number of factors, including credit
ratings and our evaluation of their financial condition. In many contracts, we employ collateral
requirements and standardized agreements that allow for the netting of positive and negative
exposures associated with a single counterparty. Valuation adjustments are established
representing our estimated credit losses on our overall exposure to counterparties. See Note 1
Derivative for a discussion of our credit valuation adjustment policy. 19. Other Income and Other Expense The following table provides detail of other income and other expense for the years ended
December 31, 2004, 2003 and 2002 (dollars in thousands): 121




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31,2004
    
    
    2003
    
    
    2002Other income:Investment gains (a)
    
    $
    38,256
    
    
    $
    3,649
    
    
    $
    Interest income
    
    
    7,470
    
    
    
    4,412
    
    
    
    4,332SunCor non-operating income (b)
    
    
    4,458
    
    
    
    24,740
    
    
    
    7,355Asset sales
    
    
    3,026
    
    
    
    618
    
    
    
    568Miscellaneous
    
    
    779
    
    
    
    2,144
    
    
    
    2,655Total other income
    
    $
    53,989
    
    
    $
    35,563
    
    
    $
    14,910Other expense:Non-operating costs (c)
    
    $
    (15,524
    )
    
    $
    (14,959
    )
    
    $
    (12,958
    )Asset sales
    
    
    (1,382
    )
    
    
    (1,522
    )
    
    
    (6,472
    )Investment losses (d)
    
    
    
    
    
    
    
    
    
    
    (10,439
    )Miscellaneous
    
    
    (4,604
    )
    
    
    (4,093
    )
    
    
    (3,786
    )Total other expense
    
    $
    (21,510
    )
    
    $
    (20,574
    )
    
    $
    (33,655
    )
   (a)
    
    Primarily related to the gain on the sale of El Dorados limited partnership interest in the
Phoenix Suns in the second quarter of 2004 for $35 million ($21 million after tax).(b)
    
    Primarily related to the sale at SunCor of a land interest and profit participation agreement
in the fourth quarter of 2003 for $18 million. In 2002, SunCor received $2.5 million for the
profit participation.(c)
    
    As defined by the FERC, includes below-the-line non-operating utility costs (primarily
community relations).(d)
    
    Primarily related to El Dorados investment losses in NAC prior to consolidation in the third
quarter of 2002. 20. Variable Interest Entities In 1986, APS entered into agreements with three separate VIE lessors in order to sell and
lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in
accordance with GAAP. See Note 9 for further information about the sale leaseback transactions.
We are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate
them. APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of
certain events that APS does not consider to be reasonably likely to occur. Under certain
circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde
or the occurrence of specified nuclear events), APS would be required to assume the debt associated
with the transactions, make specified payments to the equity participants, and take title to the
leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If
such an event had occurred as of December 31, 2004, APS would have been required to assume
approximately $250 million of debt and pay the equity participants approximately $192 million. In the first quarter of 2004, we adopted FIN No. 46R, Consolidation of Variable Interest
Entities for all non-SPE contractual arrangements. SunCor has certain land development
arrangements that are required to be consolidated under FIN
No. 46R. The assets and non-controlling 122




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS interests reflected in our Consolidated Balance Sheets related to these arrangements were
approximately $34 million at December 31, 2004. 21. Guarantees We have issued parental guarantees and letters of credit and obtained surety bonds on behalf
of our unregulated subsidiaries. Our parental guarantees related to Pinnacle West Energy consist
of equipment and performance guarantees related to our generation construction program, and
long-term service agreement guarantees for new power plants. Our credit support instruments enable
APS Energy Services to offer commodity energy and energy-related products. Non-performance or
payment under the original contract by our unregulated subsidiaries would require us to perform
under the guarantee or surety bond. No liability is currently recorded on the Consolidated Balance
Sheets related to Pinnacle Wests guarantees on behalf of its subsidiaries. Our guarantees have no
recourse or collateral provisions to allow us to recover amounts paid under the guarantee. The
amounts and approximate terms of our guarantees and surety bonds for each subsidiary at December
31, 2004 are as follows (dollars in millions): Guarantees
    
    
    Surety BondsTerm
    
    
    
    
    
    
    TermAmount
    
    
    (in years)
    
    
    Amount
    
    
    (in years)Parental:Pinnacle West Energy
    
    $
    25
    
    
    
    1
    
    
    $
    
    
    
    
    APS Energy Services
    
    
    46
    
    
    
    1
    
    
    
    51
    
    
    
    1Total
    
    $
    71
    
    
    
    
    
    
    $
    51
 At December 31, 2004, we had entered into approximately $39 million of letters of credit which
support various transmission and construction agreements. These letters of credit expire in 2005
and 2006. We intend to provide from either existing or new facilities for the extension, renewal
or substitution of the letters of credit to the extent required. At December 31, 2004, Pinnacle
West has approximately $3 million of letters of credit related to workers compensation expiring in
2006. APS has entered into various agreements that require letters of credit for financial assurance
purposes. At December 31, 2004, approximately $200 million of letters of credit were outstanding
to support existing pollution control bonds of approximately $200 million. The letters of credit
are available to fund the payment of principal and interest of such debt obligations. In July
2004, $150 million of these letters of credit were renewed for a three-year term and expire in
2007. The remainder expire in 2005. APS has also entered into approximately $102 million of
letters of credit to support certain equity lessors in the Palo Verde sale leaseback transactions
(see Note 9 for further details on the Palo Verde sale leaseback transactions). These letters of
credit expire in 2005. Additionally, APS has approximately $5 million of letters of credit related
to counterparty collateral requirements expiring in 2006. APS intends to provide from either
existing or new facilities for the extension, renewal or substitution of the letters of credit to
the extent required. We provide indemnifications relating to liabilities arising from or related to certain of our
agreements. APS has provided indemnifications to the equity participants and other parties in the
Palo Verde sale leaseback transactions with respect to certain tax matters. Generally, a maximum
obligation is not explicitly stated in the indemnification and therefore, the overall maximum
amount of the obligation under such indemnifications cannot be reasonably estimated. Based on
historical 123




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS experience and evaluation of the specific indemnities, we do not believe that any material loss
related to such indemnifications is likely. 22. Discontinued Operations The following table provides a summary of SunCor and NAC income (loss) from discontinued
operations (after income taxes) for the years ended December 31, 2004, 2003 and 2002 (dollars in
millions): 2004
    
    
    2003
    
    
    2002SunCor
    
    $
    4
    
    
    $
    10
    
    
    $
    9NAC
    
    
    4
    
    
    
    5
    
    
    
    (31
    )Total income (loss) from discontinued operations
    
    $
    8
    
    
    $
    15
    
    
    $
    (22
    )
 SunCor Certain components of SunCors real estate sales activities, which are included in the real
estate segment, are required to be reported as discontinued operations on Pinnacle Wests
Consolidated Statements of Income in accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Among other guidance, SFAS No. 144 prescribes accounting for
discontinued operations and defines certain activities as discontinued operations. In the second quarter of 2002, SunCor sold a retail center, but maintained a continuing
involvement through a management contract. In the first quarter of 2003, this management contract
was canceled. As a result, the after-tax gain of $6 million ($10 million pre-tax) recorded in
operations in 2002 related to this property was reclassified as discontinued operations on our
Consolidated Statements of Income. The income from discontinued operations in the year ended
December 31, 2002 primarily reflects this sale. In 2003, SunCor sold its water utility company, which resulted in an after-tax gain of $8
million ($14 million pretax). The amounts of the gain on the sale and operating income of the
water utility company in 2003 and 2002 are classified as discontinued operations on Pinnacle Wests
Consolidated Statements of Income. In the fourth quarter of 2003, SunCor sold a retail center, which resulted in an after-tax
gain of $2 million ($3 million pretax). The gain on the sale and the operating income related to
this property in 2003 are classified as discontinued operations on Pinnacle Wests Consolidated
Statements of Income. There were no prior-year operations related to this retail center. In 2004, SunCor sold commercial property, which resulted in an after-tax gain of $1 million
($2 million pretax). The gain on the sale and the operating income related to this property in
2004 are classified as discontinued operations on Pinnacle Wests Consolidated Statements of
Income. There were no prior-year operations related to this property. The following table provides SunCors revenue and income before income taxes (including the
gains on disposals as noted above) related to properties classified as discontinued operations on 124




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PINNACLE WEST CAPITAL CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pinnacle Wests Consolidated Statements of Income for the years ended December 31, 2004, 2003 and
2002 (dollars in millions): 2004
    
    
    2003
    
    
    2002Revenue
    
    $
    11
    
    
    $
    71
    
    
    $
    35Income before taxes
    
    
    6
    
    
    
    17
    
    
    
    15
 NAC In July 2004, we entered into an agreement to sell our investment in NAC. The transaction
closed on November 18, 2004 and resulted in a pre-tax gain of $4 million, which is classified as
discontinued operations in 2004. El Dorado began consolidating the operations of NAC in the third
quarter of 2002. All related revenues and expenses for NAC have been reclassified to discontinued
operations for the years ended December 31, 2003 and 2002 on Pinnacle Wests Consolidated
Statements of Income. The following table provides the revenue and income before taxes (including the gain on
disposal as noted above) for El Dorados investment in NAC that was classified as discontinued
operations for the years ended December 31, 2004, 2003 and 2002 (dollars in millions): 2004
    
    
    2003
    
    
    2002Revenue
    
    $
    31
    
    
    $
    58
    
    
    $
    35Income (loss) before taxes
    
    
    7
    
    
    
    8
    
    
    
    (50
    )
 Percentage-of-Completion  NAC Certain NAC contract revenues are accounted for under the percentage-of-completion method.
Revenues are recognized based upon total costs incurred to date compared to total costs expected to
be incurred for each contract. Revisions in contract revenue and cost estimates are reflected in
the accounting period when known. Provisions are made for the full amounts of anticipated losses
in the periods in which they are first determined. Changes in job performance, job conditions and
estimated profitability, including those arising from contract penalty provisions and final
contract settlements, may result in revisions to costs and income, and are recognized in the period
in which revisions are determined. Profit incentives are included in revenues when their
realization is reasonably assured. Contract costs include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs.
General and administrative costs are charged to expense as incurred. 125




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Assets and Liabilities Related to Discontinued Operations Due
to the sale of NAC, all NAC assets and liabilities have been reclassified to assets and
liabilities related to discontinued operations on the Consolidated Balance Sheets at December 31,
2003 and are provided in the following table (dollars in thousands): Cash
    
    $
    5,867Customer and other receivables
    
    
    11,066Net property, plant and equipment
    
    
    5,404Other
    
    
    728Assets related to discontinued operations
    
    $
    23,065Accounts payable
    
    $
    10,406Long-term debt less current maturities
    
    
    800Other
    
    
    5,221Liabilities related to discontinued operations
    
    $
    16,427
 126




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MANAGEMENTS REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(ARIZONA PUBLIC SERVICE COMPANY) Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rules 13(a)-15(f). Management conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control  Integrated Framework,our management concluded that our internal control over financial
reporting was effective as of December 31, 2004. Our managements assessment of the effectiveness
of our internal control over financial reporting as of December 31, 2004 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report
which is included herein and relates also to the Companys
financial statements. March 15, 2005 127




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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
Arizona Public Service Company
Phoenix, Arizona We have audited the accompanying balance sheets of Arizona Public Service Company (the Company)
as of December 31, 2004 and 2003, and the related statements of income, changes in common stock
equity, and cash flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the Index at Item 15. We also have
audited managements assessment, included in the accompanying Managements Report on Internal
Control Over Financial Reporting, that the Company maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for these financial statements and financial
statement schedule, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule, an opinion on managements assessment, and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements. 128




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Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2004 and 2003, and the results
of its operations and its cash flows for each of the three years in the period ended December 31,
2004, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein. Also, in our opinion, managements assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in
our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. DELOITTE & TOUCHE LLP
Phoenix, Arizona March 15, 2005 129




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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(dollars in thousands) Year Ended December 31,2004
    
    
    2003
    
    
    2002Electric Operating Revenues:Regulated electricity
    
    $
    2,051,602
    
    
    $
    1,999,390
    
    
    $
    1,902,112Marketing and trading
    
    
    145,519
    
    
    
    105,541
    
    
    
    34,054Total
    
    
    2,197,121
    
    
    
    2,104,931
    
    
    
    1,936,166Operating Expenses:Regulated electricity
purchased power and fuel
    
    
    612,300
    
    
    
    606,251
    
    
    
    438,141Marketing and trading
purchased power and fuel
    
    
    150,954
    
    
    
    97,180
    
    
    
    32,662Operations and maintenance
    
    
    540,277
    
    
    
    513,604
    
    
    
    495,845Depreciation and amortization
    
    
    336,648
    
    
    
    389,240
    
    
    
    399,640Income taxes (Notes 4 and S-2)
    
    
    113,696
    
    
    
    91,646
    
    
    
    132,953Other taxes
    
    
    114,265
    
    
    
    108,852
    
    
    
    107,925Total
    
    
    1,868,140
    
    
    
    1,806,773
    
    
    
    1,607,166Operating Income
    
    
    328,981
    
    
    
    298,158
    
    
    
    329,000Other Income (Deductions):Income taxes (Notes 4 and S-2)
    
    
    (6,334
    )
    
    
    4,792
    
    
    
    6,148Allowance for equity funds used
during construction
    
    
    4,885
    
    
    
    14,240
    
    
    
    Other income (Note S-9)
    
    
    30,593
    
    
    
    20,277
    
    
    
    5,149Other expense (Note S-9)
    
    
    (13,816
    )
    
    
    (12,962
    )
    
    
    (19,338
    )Total
    
    
    15,328
    
    
    
    26,347
    
    
    
    (8,041
    )Interest Deductions:Interest on long-term debt
    
    
    140,556
    
    
    
    142,706
    
    
    
    128,462Interest on short-term borrowings
    
    
    6,427
    
    
    
    4,904
    
    
    
    5,416Debt discount, premium and expense
    
    
    4,854
    
    
    
    3,337
    
    
    
    2,888Capitalized interest
    
    
    (7,155
    )
    
    
    (7,379
    )
    
    
    (15,150
    )Total
    
    
    144,682
    
    
    
    143,568
    
    
    
    121,616Net Income
    
    $
    199,627
    
    
    $
    180,937
    
    
    $
    199,343
 See Notes to Pinnacle Wests Consolidated Financial Statements and Supplemental Notes to Arizona
Public Service Companys Financial Statements. 130




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ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands) December 31,2004
    
    
    2003ASSETSUtility
Plant (Notes 1, 6, 9 and 10)
Electric plant in service and held for future use
    
    $
    9,120,407
    
    
    $
    8,826,033Less accumulated depreciation and amortization
    
    
    3,266,181
    
    
    
    3,089,645Total
    
    
    5,854,226
    
    
    
    5,736,388Construction work in progress
    
    
    249,243
    
    
    
    187,478Intangible assets, net of accumulated amortization of $154,843 and $120,895
    
    
    103,701
    
    
    
    94,181Nuclear fuel, net of accumulated amortization of
$59,020 and $58,053
    
    
    51,188
    
    
    
    52,011Utility plant  net
    
    
    6,258,358
    
    
    
    6,070,058Investments and Other AssetsNote receivable from Pinnacle West Energy
(Notes 1, 3 and S-10)
    
    
    498,489
    
    
    
    497,865Decommissioning trust accounts (Note 12)
    
    
    267,700
    
    
    
    240,645Assets from risk management and trading activities 
long-term (Note S-8)
    
    
    20,123
    
    
    
    18,001Other assets
    
    
    61,364
    
    
    
    64,119Total investments and other assets
    
    
    847,676
    
    
    
    820,630Current Assets:Cash and cash equivalents
    
    
    49,575
    
    
    
    42,152Investment in debt securities
    
    
    181,175
    
    
    
    69,850Accounts receivable:Service customers
    
    
    214,487
    
    
    
    190,884Other (Note 1)
    
    
    63,131
    
    
    
    67,540Allowance for doubtful accounts
    
    
    (3,444
    )
    
    
    (3,743
    )Accrued utility revenues
    
    
    76,154
    
    
    
    71,501Materials and supplies (at average cost)
    
    
    83,893
    
    
    
    80,682Fossil fuel (at average cost)
    
    
    20,506
    
    
    
    28,360Assets from risk management and trading activities
(Note S-8)
    
    
    70,430
    
    
    
    52,448Other
    
    
    10,187
    
    
    
    6,969Total current assets
    
    
    766,094
    
    
    
    606,643Deferred Debits:Regulatory assets (Notes 1, 3 and S-2)
    
    
    135,051
    
    
    
    132,349Unamortized debt issue costs
    
    
    21,832
    
    
    
    19,797Other
    
    
    69,541
    
    
    
    73,056Total deferred debits
    
    
    226,424
    
    
    
    225,202Total Assets
    
    $
    8,098,552
    
    
    $
    7,722,533
 See Notes to Pinnacle Wests Consolidated Financial Statements and Supplemental Notes to Arizona
Public Service Companys Financial Statements. 131




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ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands) December 31,2004
    
    
    2003LIABILITIES AND EQUITYCapitalization:Common stock
    
    $
    178,162
    
    
    $
    178,162Additional paid-in capital
    
    
    1,246,804
    
    
    
    1,246,804Retained earnings
    
    
    860,196
    
    
    
    830,569Accumulated other comprehensive income (loss):Minimum pension liability adjustment
    
    
    (71,087
    )
    
    
    (57,158
    )Derivative instruments
    
    
    18,327
    
    
    
    5,253Common stock equity
    
    
    2,232,402
    
    
    
    2,203,630Long-term debt less current maturities (Notes 6 and
S-3)
    
    
    2,267,094
    
    
    
    2,135,606Total capitalization
    
    
    4,499,496
    
    
    
    4,339,236Current Liabilities:Current maturities of long-term debt (Notes 6 and S-3)
    
    
    451,247
    
    
    
    487,067Accounts payable
    
    
    215,076
    
    
    
    131,383Accrued taxes
    
    
    292,521
    
    
    
    90,474Accrued interest
    
    
    33,332
    
    
    
    42,702Customer deposits
    
    
    51,804
    
    
    
    45,481Deferred income taxes (Notes 4 and S-2)
    
    
    9,057
    
    
    
    631Liabilities from risk management and trading
activities (Note S-8)
    
    
    34,292
    
    
    
    58,138Other
    
    
    91,441
    
    
    
    60,008Total current liabilities
    
    
    1,178,770
    
    
    
    915,884Deferred Credits and Other:Deferred income taxes (Notes 4 and S-2)
    
    
    1,108,571
    
    
    
    1,257,671Regulatory liabilities (Notes 1, 3, 4, and S-2)
    
    
    506,646
    
    
    
    468,694Liability for asset retirements and removals (Note 12)
    
    
    251,612
    
    
    
    234,440Pension liability (Note 8)
    
    
    203,668
    
    
    
    160,639Unamortized gain  sale of utility plant (Note 9)
    
    
    50,333
    
    
    
    54,909Customer advances for construction
    
    
    59,185
    
    
    
    52,783Liabilities from risk management and trading
activities (Note S-8)
    
    
    13,124
    
    
    
    4,502Other
    
    
    227,147
    
    
    
    233,775Total deferred credits and other
    
    
    2,420,286
    
    
    
    2,467,413Commitments and Contingencies (Notes 3, 11, 12 and S-10)Total Liabilities and Equity
    
    $
    8,098,552
    
    
    $
    7,722,533
 See Notes to Pinnacle Wests Consolidated Financial Statements and Supplemental Notes to Arizona
Public Service Companys Financial Statements. 132




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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(dollars in thousands) Year Ended December 31,2004
    
    
    2003
    
    
    2002Cash Flows from Operating Activities:Net income
    
    $
    199,627
    
    
    $
    180,937
    
    
    $
    199,343Items not requiring cash:Depreciation and amortization
    
    
    336,648
    
    
    
    389,240
    
    
    
    399,640Nuclear fuel amortization
    
    
    30,446
    
    
    
    28,757
    
    
    
    31,185Allowance for equity funds used during
construction
    
    
    (4,885
    )
    
    
    (14,240
    )
    
    
    Deferred income taxes
    
    
    (140,855
    )
    
    
    (1,087
    )
    
    
    206,767Change in derivative mark-to-market
valuations
    
    
    (15,807
    )
    
    
    2,339
    
    
    
    2,957Changes in certain current assets and liabilities:Accounts receivable
    
    
    (19,493
    )
    
    
    83,692
    
    
    
    (102,450
    )Accrued utility revenues
    
    
    (4,653
    )
    
    
    1,414
    
    
    
    3,216Materials, supplies and fossil fuel
    
    
    4,643
    
    
    
    (872
    )
    
    
    68Other current assets
    
    
    (2,529
    )
    
    
    976
    
    
    
    2,227Accounts payable
    
    
    88,937
    
    
    
    17,961
    
    
    
    15,372Accrued taxes
    
    
    202,047
    
    
    
    7,917
    
    
    
    (25,038
    )Accrued interest
    
    
    (9,370
    )
    
    
    94
    
    
    
    1,565Other current liabilities
    
    
    37,756
    
    
    
    13,804
    
    
    
    44,224Increase in regulatory assets
    
    
    (2,702
    )
    
    
    (20,971
    )
    
    
    (11,029
    )Change in risk management trading  assets
    
    
    (6,845
    )
    
    
    12,551
    
    
    
    (22,570
    )Change in risk management trading  liabilities
    
    
    8,879
    
    
    
    
    
    
    
    Change in customer advances
    
    
    6,402
    
    
    
    7,270
    
    
    
    (23,780
    )Change in pension liability
    
    
    22,361
    
    
    
    17,395
    
    
    
    7,016Change in other long-term assets
    
    
    (27,994
    )
    
    
    (5,349
    )
    
    
    (24,502
    )Change in other long-term liabilities
    
    
    15,525
    
    
    
    55,296
    
    
    
    301Net cash flow provided by operating activities
    
    
    718,138
    
    
    
    777,124
    
    
    
    704,512Cash Flows from Investing Activities:Capital expenditures
    
    
    (513,677
    )
    
    
    (426,260
    )
    
    
    (490,156
    )Capitalized interest
    
    
    (7,155
    )
    
    
    (7,379
    )
    
    
    (15,150
    )Purchases of investment securities
    
    
    (871,810
    )
    
    
    (855,660
    )
    
    
    Proceeds from sale of investment securities
    
    
    760,485
    
    
    
    785,810
    
    
    
    Loan to Pinnacle West Energy
    
    
    
    
    
    
    (497,865
    )
    
    
    Other
    
    
    (805
    )
    
    
    (8,296
    )
    
    
    44,918Net cash flow used for investing activities
    
    
    (632,962
    )
    
    
    (1,009,650
    )
    
    
    (460,388
    )Cash Flows from Financing Activities:Issuance of long-term debt
    
    
    478,140
    
    
    
    491,654
    
    
    
    459,926Short-term borrowings
    
    
    
    
    
    
    
    
    
    
    (171,162
    )Dividends paid on common stock
    
    
    (170,000
    )
    
    
    (170,000
    )
    
    
    (170,000
    )Repayment and reacquisition of long-term debt
    
    
    (385,893
    )
    
    
    (89,525
    )
    
    
    (337,160
    )Net cash flow provided by (used for) financing
activities
    
    
    (77,753
    )
    
    
    232,129
    
    
    
    (218,396
    )Net increase/(decrease) in cash and cash equivalents
    
    
    7,423
    
    
    
    (397
    )
    
    
    25,728Cash and cash equivalents at beginning of year
    
    
    42,152
    
    
    
    42,549
    
    
    
    16,821Cash and cash equivalents at end of year
    
    $
    49,575
    
    
    $
    42,152
    
    
    $
    42,549Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes paid/(refunded)
    
    $
    68,074
    
    
    $
    74,523
    
    
    $
    (54,283
    )Interest, net of amounts capitalized
    
    $
    149,148
    
    
    $
    140,010
    
    
    $
    117,081
 See Notes to Pinnacle Wests Consolidated Financial Statements and Supplemental Notes to Arizona
Public Service Companys Financial Statements. 133




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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands) Years Ended December 31,2004
    
    
    2003
    
    
    2002COMMON STOCK
    
    $
    178,162
    
    
    $
    178,162
    
    
    $
    178,162ADDITIONAL PAID-IN CAPITAL
    
    
    1,246,804
    
    
    
    1,246,804
    
    
    
    1,246,804RETAINED EARNINGSBalance at beginning of year
    
    
    830,569
    
    
    
    819,632
    
    
    
    790,289Net income
    
    
    199,627
    
    
    
    180,937
    
    
    
    199,343Common stock dividends
    
    
    (170,000
    )
    
    
    (170,000
    )
    
    
    (170,000
    )Balance at end of year
    
    
    860,196
    
    
    
    830,569
    
    
    
    819,632ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)Balance at beginning of year
    
    
    (51,905
    )
    
    
    (85,286
    )
    
    
    (64,565
    )Minimum pension liability adjustment, net of
tax expense (benefit) of ($8,936), $3,105
and ($39,696)
    
    
    (13,929
    )
    
    
    4,329
    
    
    
    (60,521
    )Unrealized gain on derivative instruments,
net of tax expense of $16,824, $15,824 and
$25,426
    
    
    25,892
    
    
    
    24,135
    
    
    
    38,764Reclassification of realized (gain)/loss to
income, net of tax expense (benefit) of
($8,344), $3,207 and $679
    
    
    (12,818
    )
    
    
    4,917
    
    
    
    1,036Balance at end of year
    
    
    (52,760
    )
    
    
    (51,905
    )
    
    
    (85,286
    )TOTAL COMMON STOCK EQUITY
    
    $
    2,232,402
    
    
    $
    2,203,630
    
    
    $
    2,159,312COMPREHENSIVE INCOMENet income
    
    $
    199,627
    
    
    $
    180,937
    
    
    $
    199,343Other comprehensive income (loss)
    
    
    (855
    )
    
    
    33,381
    
    
    
    (20,721
    )Total comprehensive income
    
    $
    198,772
    
    
    $
    214,318
    
    
    $
    178,622
 See Notes to Pinnacle Wests Consolidated Financial Statements and Supplemental Notes to Arizona
Public Service Companys Financial Statements. 134




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Certain notes to Arizona Public Service Companys financial statements are combined with the
notes to Pinnacle West Capital Corporations consolidated financial statements. Listed below are
the consolidated notes to Pinnacle West Capital Corporations consolidated financial statements,
the majority of which also relate to Arizona Public Service Companys financial statements. In
addition, listed below are the supplemental notes which are required disclosures for Arizona Public
Service Company and should be read in conjunction with Pinnacle West Capital Corporations
Consolidated Notes. Consolidated
    
    APS SupplementalFootnote Reference
    
    Footnote ReferenceSummary of Significant Accounting Policies
    
    Note 1
    
    Note S-1New Accounting Standards
    
    Note 2
    
    Regulatory Matters
    
    Note 3
    
    Income Taxes
    
    Note 4
    
    Note S-2Lines of Credit and Short-Term Borrowings
    
    Note 5
    
    Long-Term Debt
    
    Note 6
    
    Note S-3Common Stock and Treasury Stock
    
    Note 7
    
    Retirement Plans and Other Benefits
    
    Note 8
    
    Leases
    
    Note 9
    
    Note S-4Jointly-Owned Facilities
    
    Note 10
    
    Commitments and Contingencies
    
    Note 11
    
    Note S-5Asset Retirement Obligations
    
    Note 12
    
    Selected Quarterly Financial Data (Unaudited)
    
    Note 13
    
    Note S-6Fair Value of Financial Instruments
    
    Note 14
    
    Note S-7Earnings Per Share
    
    Note 15
    
    Stock-Based Compensation
    
    Note 16
    
    Business Segments
    
    Note 17
    
    Derivative and Energy Trading Activities
    
    Note 18
    
    Note S-8Other Income and Other Expense
    
    Note 19
    
    Note S-9Variable Interest Entities
    
    Note 20
    
    Guarantees
    
    Note 21
    
    Discontinued Operations
    
    Note 22
    
    Related Party Transactions
    
    
    
    Note S-10
 135




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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS S-1. Summary of Significant Accounting Polices Stock-Based Compensation Pinnacle West offers stock-based compensation plans for officers and key employees of APS. In
2002, APS began applying the fair value method of accounting for stock-based compensation, as
provided for in SFAS No. 123, Accounting for Stock-Based Compensation. The fair value method of
accounting is the preferred method. In accordance with the transition requirements of SFAS No.
123, APS applied the fair value method prospectively, beginning with 2002 stock grants. In prior
years, APS recognized stock compensation expense based on the intrinsic value method allowed in
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. The following chart compares APS net income and stock compensation expense to what those
items would have been if APS had recorded stock compensation expense based on the fair value method
for all stock grants through 2004 (dollars in thousands): 2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    199,627
    
    
    $
    180,937
    
    
    $
    199,343Add: Stock compensation
expense included in reported
net income (net of tax)
    
    
    3,353
    
    
    
    2,035
    
    
    
    1,493Deduct: Total stock
compensation expense
determined under fair
value method (net of tax)
    
    
    (3,713
    )
    
    
    (3,024
    )
    
    
    (2,455
    )Pro forma net income
    
    $
    199,267
    
    
    $
    179,948
    
    
    $
    198,381
 S-2. Income Taxes APS is included in our consolidated tax return. However, when we allocate income taxes to
APS, we do so based on APS taxable income or loss alone. As a result of a change in IRS guidance, we claimed a tax
deduction related to an APS tax accounting method change on the 2001 federal consolidated income
tax return. The accelerated deduction resulted in a $200 million reduction in the current income
tax liability and a corresponding increase in the plant-related deferred tax liability. In 2002,
we received an income tax refund of approximately $115 million related to our 2001 federal
consolidated income tax return. The 2001 federal consolidated income tax return is currently under
examination by the IRS. As part of this ongoing examination, the IRS is reviewing this accounting
method change and the resultant deduction. During 2004, the current income tax liability was
increased, with a corresponding decrease to plant-related deferred tax liability, to reflect the
expected outcome of this audit. We do not expect the ultimate outcome of this examination to have
a material adverse impact on our financial position, results of operations or liquidity. The income tax liability accounts reflect the tax and interest associated with the most
probable resolution of all known and measurable tax exposures. 136




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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS The components of APS income tax expense are as follows (dollars in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    207,306
    
    
    $
    75,087
    
    
    $
    (61,962
    )State
    
    
    53,579
    
    
    
    12,854
    
    
    
    (18,000
    )Total current
    
    
    260,885
    
    
    
    87,941
    
    
    
    (79,962
    )Deferred
    
    
    (140,855
    )
    
    
    (1,087
    )
    
    
    206,767Total income tax expense
    
    $
    120,030
    
    
    $
    86,854
    
    
    $
    126,805
 On the APS Statements of Income, federal and state income taxes are allocated between
operating income and other income. The following chart compares APS pretax income at the 35% federal income tax rate to income
tax expense (dollars in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Federal income tax expense at 35%
statutory rate
    
    $
    111,880
    
    
    $
    93,727
    
    
    $
    114,152Increases (reductions) in tax expense
resulting from:State income tax net of federal income
tax benefit
    
    
    12,496
    
    
    
    9,723
    
    
    
    15,036Credits and favorable adjustments related
to prior years resolved in current year
    
    
    (315
    )
    
    
    (12,944
    )
    
    
    Medicare Subsidy Part-D (see Note 8)
    
    
    (1,507
    )
    
    
    
    
    
    
    Allowance for equity funds used during
construction (see Note 1)
    
    
    (1,543
    )
    
    
    (4,984
    )
    
    
    Other
    
    
    (981
    )
    
    
    1,332
    
    
    
    (2,383
    )Income tax expense
    
    $
    120,030
    
    
    $
    86,854
    
    
    $
    126,805
 The following table sets forth the net deferred income tax liability recognized on the APS
Balance Sheets (dollars in thousands): December 31,2004
    
    
    2003Current liability
    
    $
    (9,057
    )
    
    $
    (631
    )Long term liability
    
    
    (1,108,571
    )
    
    
    (1,257,671
    )Accumulated deferred income taxes  net
    
    $
    (1,117,628
    )
    
    $
    (1,258,302
    )
 The components of the net deferred
income tax liability were as follows
(dollars in thousands): 137




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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS December 31,2004
    
    
    2003DEFERRED TAX ASSETSRegulatory liabilities:Asset retirement obligation
    
    $
    182,086
    
    
    $
    169,322Federal excess deferred income tax
    
    
    16,341
    
    
    
    18,936Other
    
    
    8,282
    
    
    
    8,302Pension liability
    
    
    80,184
    
    
    
    63,356Deferred gain on Palo Verde Unit 2
sale-leaseback
    
    
    19,816
    
    
    
    21,656Risk management and trading activities
    
    
    15,172
    
    
    
    24,706Other
    
    
    73,925
    
    
    
    72,557Total deferred tax assets
    
    
    395,806
    
    
    
    378,835DEFERRED TAX LIABILITIESPlant-related
    
    
    (1,424,859
    )
    
    
    (1,552,293
    )Regulatory assets
    
    
    (54,767
    )
    
    
    (56,270
    )Risk management and trading activities
    
    
    (33,808
    )
    
    
    (28,574
    )Total deferred tax liabilities
    
    
    (1,513,434
    )
    
    
    (1,637,137
    )Accumulated deferred income taxes  net
    
    $
    (1,117,628
    )
    
    $
    (1,258,302
    )
 S-3. Long-Term Debt Payments The following is a list of principal payments due on APS total long-term debt and capitalized
lease requirements:  
    $452 million in 2005;
    $86 million in 2006;
    $174 million in 2007;
    $1 million in 2008;
    $1 million in 2009; and
    $2,012 million, thereafter. S-4. Leases Total lease expense recognized in the APS Statements of Income was $57 million in 2004, $66
million in 2003 and $57 million in 2002. Estimated future minimum lease payments for APS operating leases are approximately as follows
(dollars in millions): 138




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\

ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS Year2005
    
    $
    652006
    
    
    642007
    
    
    632008
    
    
    612009
    
    
    61Thereafter
    
    
    352Total future lease commitments
    
    $
    666
 S-5. Commitments and Contingencies Purchased Power and Fuel Commitments APS is party to various purchased power and fuel contracts with terms expiring from 2005
through 2025 that include required purchase provisions. APS estimates the contract requirements to
be approximately $245 million in 2005; $125 million in 2006; $81 million in 2007; $66 million in
2008; $68 million in 2009 and $363 million thereafter. Included in these contract requirements is
approximately $57 million in 2005 and $36 million in 2006 for related party purchases (see Note 3).
However, these amounts may vary significantly pursuant to certain provisions in such contracts
that permit us to decrease required purchases under certain circumstances. 139




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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS S-6. Selected Quarterly Financial Data (Unaudited) The following note presents quarterly financial information for 2004 and 2003. APS is
disclosing originally reported amounts and revised amounts in the first and second quarters of 2004
due to the adoption of FSP 106-2 (see Note 8). Quarterly financial information for 2004 and 2003
is as follows (dollars in thousands): 2004 Quarter Ended,March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    TotalAs originally reported:Operating Revenues
    
    $
    441,102
    
    
    $
    569,658
    
    
    $
    700,512
    
    
    $
    485,849
    
    
    $
    2,197,121Operations and Maintenance
    
    
    126,988
    
    
    
    127,947
    
    
    
    143,338
    
    
    
    144,156
    
    
    
    542,429Operating Income
    
    
    65,974
    
    
    
    82,528
    
    
    
    129,682
    
    
    
    48,645
    
    
    
    326,829Net Income
    
    
    33,353
    
    
    
    53,858
    
    
    
    95,192
    
    
    
    15,072
    
    
    
    197,475Medicare Subsidy Adoption
(see Note 8):Operations and Maintenance
    
    
    (1,076
    )
    
    
    (1,076
    )
    
    
    
    
    
    
    
    
    
    
    (2,152
    )Operating Income
    
    
    1,076
    
    
    
    1,076
    
    
    
    
    
    
    
    
    
    
    
    2,152Net Income
    
    
    1,076
    
    
    
    1,076
    
    
    
    
    
    
    
    
    
    
    
    2,152After Medicare Subsidy Adoption:Operating Revenues
    
    
    441,102
    
    
    
    569,658
    
    
    
    700,512
    
    
    
    485,849
    
    
    
    2,197,121Operations and Maintenance
    
    
    125,912
    
    
    
    126,871
    
    
    
    143,338
    
    
    
    144,156
    
    
    
    540,277Operating Income
    
    
    67,050
    
    
    
    83,604
    
    
    
    129,682
    
    
    
    48,645
    
    
    
    328,981Net Income
    
    
    34,429
    
    
    
    54,934
    
    
    
    95,192
    
    
    
    15,072
    
    
    
    199,627
 2003 Quarter Ended,March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    TotalAs originally reported:Operating Revenues
    
    $
    431,937
    
    
    $
    533,322
    
    
    $
    682,616
    
    
    $
    457,056
    
    
    $
    2,104,931Operating Income
    
    
    46,830
    
    
    
    76,258
    
    
    
    120,415
    
    
    
    54,655
    
    
    
    298,158Net Income
    
    
    15,933
    
    
    
    43,175
    
    
    
    100,356
    
    
    
    21,473
    
    
    
    180,937
 S-7. Fair Value of Financial Instruments APS believes that the carrying amounts of its cash equivalents are reasonable estimates of
their fair values at December 31, 2004 and 2003 due to their short maturities. We hold investments in debt securities for purposes other than trading. We believe that the
carrying amounts of these investments represent reasonable estimates of their fair values at December 31,
2004 and 2003 due to the short-term reset of interest rates. APS holds investments in fixed income and domestic equity securities for purposes other than
trading. The December 31, 2004 and 2003 fair values of such investments, which APS determines by
using quoted market prices, approximate their carrying amount. For further information, see
disclosure of cost and fair value of APS nuclear decommissioning trust fund assets in Note 12. On December 31, 2004, the carrying value of APS long-term debt (excluding capitalized lease
obligations) was $2.71 billion, with an estimated fair value of $2.81 billion. The carrying value
of APS long-term debt (excluding capital lease obligations) was $2.61 billion on December 31, 140




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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS 2003, with an estimated fair value of $2.74 billion. The fair value estimates are based on
quoted market prices of the same or similar issues. S-8. Derivative and Energy Trading Accounting APS is exposed to the impact of market fluctuations in the commodity price and transportation
costs of electricity, natural gas, coal and emissions allowances. As part of its overall risk
management program, APS uses various commodity instruments that qualify as derivatives to hedge
purchases and sales of electricity, fuels and emissions allowances and credits. As of December 31,
2004, APS hedged exposures to these risks for a maximum of three years. Cash Flow Hedges The changes in the fair value of APS hedged positions included in the APS Statements of
Income for the years ended December 31, 2004, 2003 and 2002 are comprised of the following (dollars in
thousands): 2004
    
    
    2003
    
    
    2002Gains/(losses) on the ineffective
portion of
derivatives qualifying for hedge
accounting
    
    $
    (1,570
    )
    
    $
    7,033
    
    
    $
    9,091Gains/(losses) from the change in options
time value excluded from measurement
of effectiveness
    
    
    185
    
    
    
    181
    
    
    
    (609
    )Gains/(losses) from the discontinuance of
cash flow hedges
    
    
    575
    
    
    
    
    
    
    
    (9,206
    )
 During the twelve months ending December 31, 2005, APS estimates that a net gain of $23
million before income taxes will be reclassified from accumulated other comprehensive loss as an
offset to the effect on earnings of market price changes for the related hedged transactions. APS assets and liabilities from risk management and trading activities are presented in two
categories:  
    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. The following table summarizes APS assets and liabilities from risk management and trading
activities at December 31, 2004 and 2003 (dollars in thousands): 141




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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS December 31, 2004 Current
    
    
    
    
    
    
    Current
    
    
    Other
    
    
    Net Asset/Assets
    
    
    Investments
    
    
    Liabilities
    
    
    Liabilities
    
    
    (Liability)Regulated Electricity:Mark-to-Market
    
    $
    45,220
    
    
    $
    19,417
    
    
    $
    (19,191
    )
    
    $
    (12,000
    )
    
    $
    33,446Options and margin account
    
    
    18,821
    
    
    
    118
    
    
    
    (8,879
    )
    
    
    
    
    
    
    10,060Marketing & Trading:Mark-to-Market
    
    
    6,389
    
    
    
    581
    
    
    
    (6,222
    )
    
    
    (1,124
    )
    
    
    (376
    )Emissions Allowances
at cost
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Total
    
    $
    70,430
    
    
    $
    20,123
    
    
    $
    (34,292
    )
    
    $
    (13,124
    )
    
    $
    43,137
 December 31, 2003 Current
    
    
    
    
    
    
    Current
    
    
    Other
    
    
    Net Asset/Assets
    
    
    Investments
    
    
    Liabilities
    
    
    Liabilities
    
    
    (Liability)Regulated Electricity:Mark-to-Market
    
    $
    44,079
    
    
    $
    5,900
    
    
    $
    (47,268
    )
    
    $
    (3,028
    )
    
    $
    (317
    )Options
    
    
    
    
    
    
    12,101
    
    
    
    
    
    
    
    
    
    
    
    12,101Marketing & Trading:Mark-to-Market
    
    
    8,369
    
    
    
    
    
    
    
    (10,870
    )
    
    
    (1,474
    )
    
    
    (3,975
    )Total
    
    $
    52,448
    
    
    $
    18,001
    
    
    $
    (58,138
    )
    
    $
    (4,502
    )
    
    $
    7,809
 Cash or other assets may be required to serve as collateral against APS open positions on
certain energy-related contracts. No collateral was provided to counterparties at December 31,
2004 or at December 31, 2003. Collateral provided to us by counterparties is $6 million at
December 31, 2004 and $12 million at December 31, 2003, and is included in other current
liabilities on the Balance Sheet. S-9. Other Income and Other Expense The following table provides detail of APS other income and other expense for the years ended
December 31, 2004, 2003 and 2002 (dollars in thousands): 142




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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31,2004
    
    
    2003
    
    
    2002Other income:Interest income
    
    $
    22,354
    
    
    $
    15,660
    
    
    $
    3,455Miscellaneous
    
    
    2,021
    
    
    
    1,892
    
    
    
    1,126Investment gains  net
    
    
    3,192
    
    
    
    2,107
    
    
    
    Asset sales
    
    
    3,026
    
    
    
    618
    
    
    
    568Total other income
    
    $
    30,593
    
    
    $
    20,277
    
    
    $
    5,149Other expense:Non-operating costs (a)
    
    $
    (8,923
    )
    
    $
    (9,361
    )
    
    $
    (9,952
    )Asset sales
    
    
    (1,212
    )
    
    
    (1,522
    )
    
    
    (6,472
    )Miscellaneous
    
    
    (3,681
    )
    
    
    (2,079
    )
    
    
    (1,783
    )Equity losses  net
    
    
    
    
    
    
    
    
    
    
    (1,131
    )Total other expense
    
    $
    (13,816
    )
    
    $
    (12,962
    )
    
    $
    (19,338
    )
   (a)
    
    As defined by the FERC, includes below-the-line non-operating utility costs
(primarily community relations). S-10. Related Party Transactions From time to time, APS enters into transactions with Pinnacle West or Pinnacle Wests
subsidiaries. The following table summarizes the amounts included in the APS Statements of Income
and Balance Sheets related to transactions with affiliated companies (dollars in millions): 143




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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31,2004
    
    
    2003
    
    
    2002Electric operating revenues:Pinnacle West  marketing and trading
    
    $
    13
    
    
    $
    12
    
    
    $
    85Pinnacle West Energy
    
    
    3
    
    
    
    9
    
    
    
    Total
    
    $
    16
    
    
    $
    21
    
    
    $
    85Purchased power and fuel costs:Pinnacle West  marketing and trading
    
    $
    
    
    
    $
    
    
    
    $
    135Pinnacle West Energy
    
    
    75
    
    
    
    70
    
    
    
    Total
    
    $
    75
    
    
    $
    70
    
    
    $
    135Other:Pinnacle West Energy:Lease expense
    
    $
    
    
    
    $
    10
    
    
    $
    Interest income
    
    $
    19
    
    
    $
    12
    
    
    $
    Capital expenditures:Pinnacle West  marketing and trading
    
    $
    11
    
    
    $
    
    
    
    $
    Pinnacle West
    
    
    22
    
    
    
    
    
    
    
    Total
    
    $
    33
    
    
    $
    
    
    
    $
    
 As of December 31,2004
    
    
    2003Net intercompany receivables/(payables):Pinnacle West Energy (a)
    
    $
    467
    
    
    $
    463Pinnacle West  marketing and trading
    
    
    19
    
    
    
    16APS Energy Services
    
    
    9
    
    
    
    10Pinnacle West
    
    
    (5
    )
    
    
    (8
    )Total
    
    $
    490
    
    
    $
    481
  (a)
    This net intercompany receivable primarily consists of the $500 million of debt
APS issued to Pinnacle West Energy pursuant to the Financing Order (see ACC Financing
Order in Note 3). Electric revenues include sales of electricity to affiliated companies at contract prices.
Purchased power includes purchases of electricity from affiliated companies at contract prices.
The Company purchases electricity from and sells electricity to APS Energy Services; however, these
transactions are settled net and reported net in accordance with EITF 03-11, Reporting Realized
Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not Held
for Trading Purposes As Defined in Issue No. 2-3. See Note 18 for more information related to
EITF 03-11. Intercompany receivables primarily include the amounts related to the loan APS made to
Pinnacle West Energy and intercompany sales of electricity. Intercompany payables primarily
include amounts related to the intercompany purchases of electricity. Intercompany receivables and
payables are generally settled on a current basis in cash. 144




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PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands) 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
    
    
    periodReal estate valuation reserves:2004
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2003
    
    
    1,661
    
    
    
    
    
    
    
    
    
    
    
    1,661
    (a)
    
    
    2002
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    339
    (a)
    
    
    1,661Reserve for uncollectibles:2004
    
    $
    9,223
    
    
    $
    2,868
    
    
    $
    
    
    
    $
    7,195
    
    
    $
    4,8962003
    
    
    9,607
    
    
    
    3,715
    
    
    
    
    
    
    
    4,099
    
    
    
    9,2232002
    
    
    14,334
    
    
    
    (21
    )
    
    
    
    
    
    
    4,706
    
    
    
    9,607Reserve for contract losses:2004
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2003
    
    
    13,000
    
    
    
    
    
    
    
    
    
    
    
    13,000
    
    
    
    2002
    
    
    
    
    
    
    13,000
    (b)
    
    
    
    
    
    
    
    
    
    
    13,000
   (a)
    
    Represents pro-rata allocations for sale of land.(b)
    
    Contract losses related to NAC (see Note 22  Discontinued Operations  NAC). 145




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ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE II  RESERVE FOR UNCOLLECTIBLES
(dollars in thousands) 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:2004
    
    $
    3,743
    
    
    $
    2,446
    
    
    $
    
    
    
    $
    2,745
    
    
    $
    3,4442003
    
    
    1,341
    
    
    
    5,716
    
    
    
    
    
    
    
    3,314
    
    
    
    3,7432002
    
    
    3,349
    
    
    
    2,680
    
    
    
    
    
    
    
    4,688
    
    
    
    1,341
 146




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures The term disclosure controls and procedures means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Securities Exchange Act of 1934
(the Exchange Act) (15 U.S.C. 78a et seq.) is recorded, processed, summarized
and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to a companys management, including its principal
executive and principal financial officers, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure. Pinnacle Wests management, with the participation of Pinnacle Wests Chief Executive Officer
and Chief Financial Officer, have evaluated the effectiveness of Pinnacle Wests disclosure
controls and procedures as of December 31, 2004. Based on that evaluation, Pinnacle Wests Chief
Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle Wests
disclosure controls and procedures were effective. APS management, with the participation of APS Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of APS disclosure controls and procedures as of December
31, 2004. Based on that evaluation, APS Chief Executive Officer and Chief Financial Officer have
concluded that, as of that date, APS disclosure controls and procedures were effective. (b) Managements Annual Reports on Internal Control Over Financial Reporting Reference is made to Managements Report on Internal Control Over Financial Reporting
(Pinnacle West Capital Corporation) on page 64
 of this report and Managements Report on Internal Control Over
Financial Reporting (Arizona Public Service Company) on page 128
 of this report. (c) Attestation Reports of the Registered Public Accounting Firm Reference is made
to Report of Independent Registered Public Accounting
Firm on page 65 of
this report and Report of Independent Registered Public Accounting Firm on page 129
of this report on the internal control over financial reporting of Pinnacle West and APS, respectively. (d) Changes In Internal Control Over Financial Reporting The term internal control over financial reporting (defined in SEC Rule 13a-15(f)) refers to
the process of a company that is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP. 147




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No change in Pinnacle Wests or APS internal control over financial reporting occurred during
the fiscal quarter ended December 31, 2004 that materially affected, or is reasonably likely to
materially affect, Pinnacle Wests or APS internal control over financial reporting. 
 ITEM 9B. OTHER INFORMATION None. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF PINNACLE WEST Reference is hereby made to Information About Our Board and Its Committees and Our Corporate
Governance, Election of Directors and to Section 16(a) Beneficial Ownership Reporting
Compliance in the Pinnacle West Proxy Statement relating to the Annual Meeting of Shareholders to be
held on May 18, 2005 (the 2005 Proxy Statement) and to the Supplemental Item  Executive
Officers of Pinnacle West in Part I of this report. Pinnacle West has adopted a Code of Ethics for Financial Professionals that applies to
professional employees in the areas of finance, accounting, internal audit, energy risk management,
marketing and trading financial control, tax, investor relations, and treasury and also includes
Pinnacle Wests Chief Executive Officer, Chief Financial Officer, Controller, Treasurer, and
officers holding substantially equivalent positions at Pinnacle Wests subsidiaries. The Code of
Ethics for Financial Professionals is posted on Pinnacle Wests website at www.pinnaclewest.com.
Pinnacle West intends to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure
of amendments to, or waivers from, provisions of the Code of Ethics for Financial Professionals by
posting such information on Pinnacle Wests website. 
 ITEM 11. EXECUTIVE COMPENSATION Reference is hereby made to Information About Our Board and Its Committees and Our Corporate
Governance  How are Directors compensated?; Performance Graph; and Executive Compensation in
the 2005 Proxy Statement. 
 ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS Security Ownership of Certain Beneficial Owners and Management Reference is hereby made to How Many Shares of Pinnacle West Stock are Owned by Management
and Large Shareholders? in the 2005 Proxy Statement. Securities Authorized For Issuance Under Equity Compensation Plans The following table sets forth information as of December 31, 2004 with respect to our
compensation plans and individual compensation arrangements under which our equity securities were
authorized for issuance. 148




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Equity Compensation Plan Information Number of securitiesNumber of
    
    
    
    
    
    
    remaining available forsecurities to be
    
    
    Weighted-average
    
    
    future issuance underissued upon exercise
    
    
    exercise price of
    
    
    equity compensationof outstanding
    
    
    outstanding
    
    
    plans (excludingoptions, warrants
    
    
    options, warrants
    
    
    securities reflected inPlan category
    
    and rights
    
    
    and rights
    
    
    column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved
by security
holders
    
    
    2,276,123
    
    
    $
    39.14
    
    
    
    4,393,196Equity compensation
plans not
approved by
security
holders
    
    
    
    
    
    $
    
    
    
    
    154,100Total
    
    
    2,276,123
    
    
    $
    39.14
    
    
    
    4,547,296
 Equity Compensation Plans Approved By Security Holders The Company has four equity compensation plans that were approved by its shareholders: the
Pinnacle West Capital Corporation Stock Option and Incentive Plan, under which no new options may
be granted; the Pinnacle West Capital Corporation Directors Stock Option Plan, under which no new
options may be granted; the Pinnacle West Capital Corporation 1994 Long-Term Incentive Plan, under
which no stock awards may be granted; and the Pinnacle West Capital Corporation 2002 Long-Term
Incentive Plan. See Note 16 for additional information regarding these plans. Equity Compensation Plans Not Approved By Security Holders The Company has one equity compensation plan, the Pinnacle West Capital Corporation 2000
Director Equity Plan (the 2000 Plan), for which the approval of shareholders was not required. Number of Shares Subject to the 2000 Plan. The total number of shares of the
Companys common stock granted under the 2000 Plan may not exceed 200,000. In the case of a
significant corporate event, such as a reorganization, merger or consolidation, the 2000 Plan
provides for adjustment of the above limit, the number of shares to be awarded automatically to
eligible non-employee directors and the number of shares of the Companys common stock non-employee
directors are required to own to receive an annual grant of common stock under the 2000 Plan. Eligibility for Participation. Only non-employee directors may participate in the
2000 Plan. A non-employee director is an individual who is a director of the Company but who is
not also an employee of the Company or any of its subsidiaries. Terms of Awards. The 2000 Plan provides for: (1) annual grants of common stock to
eligible non-employee directors, (2) discretionary grants of common stock to eligible non-employee
directors and (3) grants of nonqualified stock options to eligible non-employee directors. 149




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##### Table of Contents



Annual Grants of Stock Each individual who is a non-employee director as of July 1 of a calendar year, and who meets
requirements of ownership of the Companys common stock set forth below, will receive 900 shares of
the Companys common stock for such calendar year. In the first calendar year in which a
non-employee director is eligible to participate in the 2000 Plan, he or she must own at least 900
shares of the Companys common stock as of December 31 of the same calendar year to receive a grant
of 900 shares of the Companys common stock. If the non-employee director owns 900 shares of
common stock as of June 30, he or she will receive a grant of 900 shares of common stock as of July
1 of the same calendar year. If the non-employee director does not own 900 shares of the Companys
common stock as of June 30, but acquires the necessary shares on or before December 31 of the same
year, he or she will receive a grant of 900 shares of common stock within a reasonable time after
the Company verifies that the requisite number of shares has been acquired. In each subsequent
year, the number of shares of the Companys common stock the non-employee director must own to
receive a grant of 900 shares of common stock will increase by 900 shares, until reaching a maximum
of 4,500 shares. In each of the subsequent years, the non-employee director must own the requisite
number of shares of the Companys common stock as of June 30 of the relevant calendar year. Discretionary Grants of Stock The Human Resources Committee of the Board of Directors administers the 2000 Plan and may
grant shares of the Companys common stock to non-employee directors in its discretion. No
discretionary grants of common stock have been made under the 2000 Plan. Grants of Non-qualified Stock Options The Committee can grant non-qualified stock options under the 2000 Plan. The terms and the
conditions of the option grant, including the exercise price per share, which may not be less than
fair market value on the date of grant, will be set by the Committee in a written award agreement.
The Committee will determine the time or times at which any such options may be exercised in whole
or in part. The Committee will also determine the performance or other conditions, if any, that
must be satisfied before all or part of an option may be exercised. Any such options granted to a
participant will expire on the tenth anniversary date of the date of grant, unless the option is
earlier terminated, forfeited or surrendered pursuant to a provision of the 2000 Plan or the
applicable award agreement. Notwithstanding the foregoing, if a participant ceases to be a Company
director for any reason, including death or disability, any such options held by that participant
will expire on the second anniversary of the date on which the participant ceased to be a Company
director, unless otherwise provided in the applicable award agreement. Unless the Committee
provides otherwise, no such options may be sold, transferred, pledged, assigned or otherwise
alienated, other than by will, the laws of descent and distribution, or under any other
circumstances allowed by the Committee. No options have been granted under the 2000 Plan. 150




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is hereby made to How Many Shares of Pinnacle West Stock are Owned by Management and
Large Shareholders?; Executive Compensation  Human Resources Committee Interlocks and
Insider Participation and What are the Companys Executive Benefit Plans  Employment and
Severance Agreements in the 2005 Proxy Statement. 
 ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES Pinnacle West Reference is hereby made to Audit Matters  What fees were paid to APS independent
accountants in 2004 and 2003? and  What are the Audit Committees pre-approval policies? in the
2005 Proxy Statement. APS The following fees were paid to our independent public accountants, Deloitte & Touche LLP, for
the last two fiscal years: Type of Service
    
    2003
    
    
    2004Audit Fees (1)
    
    $
    1,338,846
    
    
    $
    1,910,089Audit-Related Fees (2)
    
    
    161,970
    
    
    
    318,750Tax Fees (3)
    
    
    1,677,474
    
    
    
    1,559,928All Other Fees (4)
    
    
    2,304
    
    
    
    
   (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 and 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 Sarbanes-Oxley Section 404 readiness.(3)
    
    The aggregate fees billed primarily for investment tax credit services, tax compliance and
tax planning.(4)
    
    The aggregate fees billed for services rendered for all services in 2003, other than the
audit services described above, which for 2003 consisted of continuing professional education
fees. Pinnacle Wests Audit Committee pre-approves each audit service and non-audit service to
be provided by APS independent public accountants. The Audit Committee has delegated to the
Chairman of the Audit Committee the authority to pre-approve audit and non-audit services to be
performed by the independent public accountants if the services are not expected to cost more than
$50,000. The Chairman must report any pre-approval decisions to the Audit Committee at its next
scheduled meeting. All of the services performed by Deloitte & Touche LLP for APS were
pre-approved by the Audit Committee. 151




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Financial Statements and Financial Statement Schedules See the Index to Financial Statements and Financial Statement
Schedule in Part II, Item 8. Exhibits Filed The documents listed below are being filed or have previously been filed on behalf of Pinnacle West or APS and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith. Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit :a
    
    Effective3.1
    
    Pinnacle West
    
    Articles of
Incorporation,
restated as of July
29, 1988
    
    19.1 to Pinnacle Wests September 1988
Form 10-Q Report, File No. 1-8962
    
    11-14-883.2
    
    Pinnacle West
    
    Pinnacle West
Capital Corporation
Bylaws, amended as
of June 23, 2004
    
    3.1 to Pinnacle Wests
June 30, 2004 Form 10-Q Report, File No. 1-8962
    
    8-9-043.3
    
    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
    
    8-9-044.12
    
    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
 152




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective4.13
    
    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
    
    1-11-954.14
    
    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
    
    1-11-954.15
    
    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
    
    11-22-964.16
    
    Pinnacle WestAPS
    
    First Supplemental
Indenture
    
    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
    
    11-22-964.17
    
    Pinnacle West
APS
    
    Second Supplemental
Indenture
    
    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
    
    4-9-974.18
    
    Pinnacle West
APS
    
    Third Supplemental
Indenture
    
    10.2 to Pinnacle Wests March 2003 Form
10-Q Report, File No. 1-8962
    
    5-15-034.19
    
    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. 333-53150, File No. 1-8962
    
    1-25-01
 153




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Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective4.20
    
    Pinnacle West
    
    First Supplemental
Indenture dated as
of March 15, 2001
    
    4.2 to Pinnacle Wests Registration
Statement No. 333-52476, File No. 1-8962
    
    3-26-014.21
    
    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
    
    11-12-034.22
    
    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. 333-53150, File No. 1-8962
    
    1-25-014.23
    
    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
    
    3-31-894.24
    
    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
    
    3-30-884.25
    
    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
    
    1-16-984.26
    
    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
    
    1-16-98
 154




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective4.27
    
    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
    
    2-22-994.28
    
    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
    
    11-5-994.29
    
    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
    
    8-4-004.30
    
    Pinnacle West
APS
    
    Fifth Supplemental
Indenture dated as
of October 1, 2001
    
    4.1 to APS September 2001 Form 10-Q,
File No. 1-4473
    
    11-6-014.31
    
    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
    
    2-28-024.32
    
    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. 1-8962
    
    5-9-034.33
    
    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
    
    6-28-04
 155




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective4.34
    
    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
    
    4-19-994.35
    
    Pinnacle West
    
    Amendment to Rights
Agreement,
effective as of
January 1, 2002
    
    4.1 to Pinnacle Wests March 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-024.36
    
    Pinnacle West
    
    Second Amended and
Restated Investors
Advantage Plan
    
    4.4 to Pinnacle Wests June 23, 2004
Form 8-K Report, File No. 1-8962
    
    8-9-0410.1b
    
    Pinnacle West
APS
    
    2005 Officer and
CEO Variable
Incentive Plan10.2
    
    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
    
    3-15-0410.3
    
    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
    
    3-15-04
 156




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective10.4
    
    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
    
    3-15-0410.5
    
    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
    
    10.6 to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.6
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
Supplement Excess
Benefit Retirement
Plan, amended and
restated as of
January 1, 2003
    
    10.7 to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.7
    
    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 1991 Form 10-Q
Report, File No. 1-4473
    
    11-14-9110.8
    
    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
    
    3-30-95
 157




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective10.9
    
    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
    
    3-30-9510.10
    
    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
    
    3-28-9710.11
    
    Pinnacle West
APS
    
    Amendment No. 2 to
APS Decommissioning
Trust Agreement
(PVNGS Unit 3)
dated as of July 1,
1991
    
    10.6 to APS 1996 Form
10-K Report, File No. 1-4473
    
    3-28-9710.12
    
    Pinnacle West
APS
    
    Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2)
dated as of January
31, 1992, among
APS, Mellon Bank,
N.A., as
Decommissioning
Trustee, and State
Street Bank and
Trust Company, as
successor to The
First National
Bank of Boston, as
Owner Trustee under
two separate Trust
Agreements, each
with a separate
Equity Participant,
and as Lessor under
two separate
Facility Leases,
each relating to an
undivided interest
in PVNGS Unit 2
    
    10.1 to Pinnacle Wests 1991 Form 10-K
Report, File No. 1-8962
    
    3-26-92
 158




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective10.13
    
    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
    
    3-30-9310.14
    
    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
    
    3-30-9510.15
    
    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 1996 Form 10-Q Report,
File No. 1-4473
    
    8-9-9610.16
    
    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
    
    3-28-9710.17
    
    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 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-0210.18
    
    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 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-02
 159




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.19
    
    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 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-0210.20
    
    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
    
    5-15-0210.21
    
    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 1991 Form 10-Q Report,
File No. 1-4473
    
    8-8-9110.22
    
    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 1991 Form 10-Q Report,
File No. 1-4473
    
    8-8-9110.23
    
    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
    
    3-29-9610.24
    
    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
    
    3-29-96
 160




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.25
    
    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
    
    3-29-9610.26
    
    Pinnacle West
APS
    
    Reciprocal
Transmission
Service Agreement
between APS and
PacifiCorp dated as
of March 2, 1994
    
    10.6 to APS 1995 Form
10-K Report, File No. 1-4473
    
    3-29-9610.27
    
    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
    
    3-13-8510.28
    
    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
    
    9-1-7710.29
    
    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
    
    9-1-7710.30
    
    Pinnacle West
APS
    
    Amendment and
Supplement No. 1 to
Supplemental and
Additional
Indenture of Lease
Four Corners, dated
April 25, 1985
    
    10.36 to Pinnacle Wests Registration
Statement on Form 8-B Report, File No.
1-8962
    
    7-25-85
 161




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.31
    
    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
    
    9-1-7710.32
    
    Pinnacle West
APS
    
    Application and
Amendment No. 1 to
Grant of
multi-party
rights-of-way and
easements, Four
Corners Power Plant
Site dated April
25, 1985
    
    10.37 to Pinnacle Wests Registration
Statement on Form 8-B, File No. 1-8962
    
    7-25-8510.33
    
    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
    
    9-1-7710.34
    
    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
    
    3-14-0110.35
    
    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
    
    7-25-8510.36
    
    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
    
    3-23-7010.37
    
    Pinnacle West
APS
    
    Application of
Grant of
rights-of-way and
easements, Navajo
Plant
    
    5(h) to APS Form S-7 Registration
Statement, File No. 2-36505
    
    3-23-70
 162




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.38
    
    Pinnacle West
APS
    
    Water Service
Contract Assignment
with the United
States Department
of Interior, Bureau
of Reclamation,
Navajo Plant
    
    5(l) to APS Form S-7 Registration
Statement, File No. 2-394442
    
    3-16-7110.39
    
    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
    
    3-8-89
 163




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective10.40
    
    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 1991 Form 10-Q
Report, File No. 1-4473
    
    5-15-9110.41
    
    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 2000 Form
10-Q Report, File No. 1-8962
    
    8-14-00
 164




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective10.42c
    
    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
    
    10-24-8610.43c
    
    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 1986 Form 10-Q
Report by means of Amendment No. 1 on
December 3, 1986 Form 8, File No. 1-4473
    
    12-4-8610.44c
    
    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
    
    3-8-8910.45c
    
    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
    
    3-30-93
 165




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective10.46
    
    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
    
    1-20-8710.47
    
    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
    
    8-24-8710.48
    
    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
    
    3-30-9310.49b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
Supplemental Excess
Benefit Retirement
Plan, as amended
and restated, dated
December 7, 1999
    
    10.13 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-00
 166




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective10.50b
    
    Pinnacle West
APS
    
    First Amendment to
the Pinnacle West
Capital Corporation
Supplemental Excess
Benefit Retirement
Plan
    
    10.7 to Pinnacle Wests 2001 Form 10-K
Report, File No. 1-8962
    
    3-27-0210.51b
    
    Pinnacle West
APS
    
    Second Amendment to
the Pinnacle West
Capital Corporation
Supplemental Excess
Benefit Retirement
Plan
    
    10.8 to Pinnacle Wests 2001 Form 10-K
Report, File No. 1-8962
    
    3-27-0210.52b
    
    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
    
    10.14 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.53b
    
    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
    
    10.15 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.54b
    
    Pinnacle West
APS
    
    Directors Deferred
Compensation Plan,
as restated,
effective January
1, 1986
    
    10.1 to APS June 1986 Form 10-Q Report,
File No. 1-4473
    
    8-13-8610.55b
    
    Pinnacle West
APS
    
    Second Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan,
effective as of
January 1, 1993
    
    10.2 to APS 1993 Form
10-K Report, File No. 1-4473
    
    3-30-94
 167




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective10.56b
    
    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 1994 Form 10-Q
Report, File No. 1-4473
    
    11-10-9410.57b
    
    Pinnacle West
APS
    
    Fourth Amendment
dated December 28,
1999 to the Arizona
Public Service
Company Directors
Deferred
Compensation Plan
    
    10.8 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.58b
    
    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
    
    3-8-8910.59b
    
    Pinnacle West
APS
    
    Third Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan,
effective as of
January 1, 1993
    
    10.3 to APS 1993 Form
10-K Report, File No. 1-4473
    
    3-30-9410.60b
    
    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 1994 Form 10-Q
Report, File No. 1-4473
    
    11-10-94
 168




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective10.61b
    
    Pinnacle West
APS
    
    Fifth Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan
    
    10.3 to APS 1996 Form 10-K Report, File
No. 1-4473
    
    3-28-9710.62b
    
    Pinnacle West
APS
    
    Sixth Amendment to
Arizona Public
Service Company
Deferred
Compensation Plan
    
    10.8 to Pinnacle Wests 2000 Form 10-K
Report, File No. 1-8962
    
    3-14-0110.63b
    
    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
    
    10.7 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.64b
    
    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
    
    10.10 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.65b
    
    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 2003 Form
10-Q Report, File No. 1-8962
    
    5-15-03
 169




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Originally Filed as Exhibit:b
    
    Effective10.66a
    
    Pinnacle West
APS
    
    Schedules of
William J. Post and
Jack E. Davis to
Arizona Public
Service Company
Deferred
Compensation Plan,
as amended
    
    10.2 to Pinnacle West Form 10-K Report,
File No. 1-8962
    
    3-31-0310.67a
    
    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
    
    10.10 to APS 1995 Form 10-K Report,
File No. 1-4473
    
    3-29-9610.68a
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
and Arizona Public
Service Company
Directors
Retirement Plan,
effective as of
January 1, 1995
    
    10.7 to APS 1994 Form
10-K Report, File No. 1-4473
    
    3-30-9510.69a
    
    Pinnacle West
    
    Letter Agreement
dated July 28, 1995
between Arizona
Public Service
Company and Armando
B. Flores
    
    10.16 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.70a
    
    Pinnacle West
APS
    
    Letter Agreement
dated as of
January 1, 1996
between APS and
Robert G. Matlock &
Associates, Inc.
for consulting
services
    
    10.8 to APS 1995 Form
10-K Report, File No. 1-4473
    
    3-29-9610.71a
    
    Pinnacle West
APS
    
    Letter Agreement
dated December 21,
1993, between APS
and William L.
Stewart
    
    10.7 to APS 1994 Form 10-K Report, File
No. 1-4473
    
    3-30-96
 170




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective10.72b
    
    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
    
    3-28-9710.73b
    
    Pinnacle West
APS
    
    Letter Agreement
between APS and
William L. Stewart
    
    10.2 to APS September 1997 Form 10-Q
Report, File No. 1-4473
    
    11-12-9710.74b
    
    Pinnacle West
APS
    
    Letter Agreement
dated December 13,
1999 between APS
and William L.
Stewart
    
    10.9 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.75b
    
    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 2002 Form
10-Q Report, File No. 1-8962
    
    8-13-0210.76b
    
    Pinnacle West
APS
    
    Letter Agreement
dated October 3,
1997 between
Arizona Public
Service Company and
James M. Levine
    
    10.17 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.77b
    
    Pinnacle West
APS
    
    Employment
Agreement dated
February 27, 2003
between APS and
James M. Levine
    
    10.1 to Pinnacle Wests March 2003 Form
10-Q Report, File No. 1-8962
    
    5-15-0310.78b
    
    Pinnacle West
APS
    
    Summary of James M.
Levine Retirement
Benefits
    
    10.2 to Pinnacle Wests March 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-0210.79b
    
    Pinnacle West
APS
    
    Employment
Agreement,
effective as of
October 1, 2002,
between APS and
James M. Levine
    
    10.1 to Pinnacle Wests November 2002
Form 10-Q Report, File No. 1-8962
    
    11-14-0210.79.1b
    
    Pinnacle West
APS
    
    Amendment to
Agreement between
APS and James M.
Levine
    
    10.2 to Pinnacle Wests September 2004
Form 10-Q Report, File No. 1-8962
    
    11-8-04
 171




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.79.2b
    
    Pinnacle WestAPS
    
    Amendment to
Agreement between
APS and James M.
Levine effective as of 1-1-0510.80b
    
    Pinnacle West
APS
    
    Letter Agreement
dated June 28, 2001
between Pinnacle
West Capital
Corporation and
Steve Wheeler
    
    10.4 to Pinnacle Wests 2002 Form 10-K
Report, File No. 1-8962
    
    3-31-0310.81bd
    
    Pinnacle West
APS
    
    Key Executive
Employment and
Severance Agreement
between Pinnacle
West and certain
executive officers
of Pinnacle West
and its
subsidiaries
    
    10.1 to Pinnacle Wests June 1999 Form
10-Q Report, File No. 1-8962
    
    8-16-9910.82b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital
Corporation Stock
Option and
Incentive Plan
    
    10.1 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9310.83b
    
    Pinnacle West
APS
    
    First Amendment
dated December 7,
1999 to the
Pinnacle West
Capital Corporation
Stock Option and
Incentive Plan
    
    10.11 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.84b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
1994 Long- Term
Incentive Plan,
effective as of
March 23, 1994
    
    A to the Proxy Statement for the Plan
Report for Pinnacle Wests 1994 Annual
Meeting of Shareholders, File No.
1-8962
    
    4-16-9410.85b
    
    Pinnacle West
APS
    
    First Amendment
dated December 7,
1999 to the
Pinnacle West
Capital Corporation
1994 Long-Term
Incentive Plan
    
    10.12 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.86b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.5 to Pinnacle Wests 2002 Form 10-K
Report
    
    3-31-03
 172




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.87b
    
    Pinnacle West
    
    Pinnacle West
Capital Corporation
Director Equity
Participation Plan
    
    B to the Proxy Statement for the Plan
Report for Pinnacle Wests 1994 Annual
Meeting of Shareholders, File No. 1-8962
    
    4-16-9410.88b
    
    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
    
    7-3-0010.89
    
    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
    
    3-19-9210.90b
    
    Pinnacle West
APS
    
    APS Director Equity
Plan
    
    10.1 to APS September 1997 Form 10-Q
Report, File No. 1-4473
    
    11-12-9710.91
    
    Pinnacle West
APS
    
    Territorial
Agreement between
the Company and
Salt River Project
    
    10.1 to APS March 1998 Form 10-Q
Report, File No. 1-4473
    
    5-15-9810.92
    
    Pinnacle West
APS
    
    Power Coordination
Agreement between
the Company and
Salt River Project
    
    10.2 to APS March 1998 Form 10-Q
Report, File No. 1-4473
    
    5-15-9810.93
    
    Pinnacle West
APS
    
    Memorandum of
Agreement between
the Company and
Salt River Project
    
    10.3 to APS March 1998 Form 10-Q
Report, File No. 1-4473
    
    5-15-98
 173




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective10.94
    
    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
    
    6-26-9810.95bd
    
    Pinnacle West
APS
    
    Performance Share
Agreement under the
Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan10.96bd
    
    Pinnacle West
APS
    
    Performance Share
Agreement under the
Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan10.97bd
    
    Pinnacle West
APS
    
    Performance Share
Agreement under the
Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan10.98bd
    
    Pinnacle West
APS
    
    Performance
Accelerated Stock
Option Agreement
under Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan10.99bd
    
    Pinnacle West
APS
    
    Stock Ownership
Incentive Agreement
under Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan10.100
    
    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
 174




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective10.101
    
    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
thereof10.102
    
    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, 200110.103
    
    Pinnacle West
APS
    
    Agreement for the
Transfer and Use of
Wastewater and
Effluent by and
between APS, SRP
and PWE dated June
1, 200110.104
    
    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
SRP10.105
    
    Pinnacle West
APS
    
    Operating Agreement
for the
Co-Ownership of
Wastewater Effluent
dated November 16,
2000 by and between
APS and SRP
 175




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective10.106
    
    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
    
    8-9-0410.106.1
    
    Pinnacle West
APS
    
    Amendment to Asset
Purchase Agreement
    
    99.1 to Pinnacle Wests November 18,
2004 Form 8-K Report, File No. 1-8962
    
    12-20-0410.107
    
    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 2004
Form 10-Q Report, File No. 1-8962
    
    11-8-0410.108b
    
    Pinnacle West APS
    
    Pinnacle West CapitalCapital CorporationSupplemental ExcessBenefit Retirement
Plan,amended and restatedas of January 1, 2003
    
    10.7 to Pinnacle
Wests 2003 Form 10-K Report, File No. 1-8962
    
    3-15-0410.109b
    
    Pinnacle West APS
    
    Pinnacle West CapitalCorporation and
ArizonaPublic Service CompanyDirectors Retirement
Plan, asamended and restatedon June 21, 2000
    
    99.2 to Pinnacle
Wests Registration Statement on Form S-8 No.
333-40796, File No. 1-8962
    
    7-3-0010.110
    
    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
    
    3-19-9212.1
    
    Pinnacle West
    
    Ratio of Earnings
to Fixed Charges12.2
    
    APS
    
    Ratio of Earnings
to Fixed Charges21.1
    
    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
amended
 176




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective31.2
    
    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 2002
 177




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective99.1
    
    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
    
    3-30-9399.3c
    
    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 1992 Form 10-Q
Report, File No. 1-4473
    
    11-9-92
 178




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective99.4c
    
    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 1986 Form 10-Q
Report by means of Amendment No. 1, on
December 3, 1986 Form 8, File No. 1-4473
    
    12-4-8699.5c
    
    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
    
    3-30-93
 179




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective99.6c
    
    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
    
    10-24-8699.7c
    
    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 1986 Form 10-Q
Report by means of Amendment No. 1 on
December 3, 1986 Form 8, File No.
1-4473
    
    12-4-86
 180




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective99.8c
    
    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
    
    10-24-8699.10c
    
    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 1986 Form 10-Q
Report by means of Amendment No. l on
December 3, 1986 Form 8, File No.
1-4473
    
    12-4-86
 181




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective99.11c
    
    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 1992 Form 10-Q
Report, File No. 1-4473
    
    11-9-92
 182




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective99.13
    
    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
 183




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit:a
    
    Effective99.15
    
    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
 184




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective99.17
    
    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
 185




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously Filed as Exhibit:a
    
    Effective99.21
    
    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
    
    Rate Reduction
Agreement dated
December 4, 1995
between APS and the
ACC Staff
    
    10.1 to APS December 4, 1995 Form 8-K
Report, File No. 1-4473
    
    12-14-9599.23
    
    Pinnacle West
APS
    
    ACC Order dated
April 24, 1996
    
    10.1 to APS March 1996 Form 10-Q
Report, File No. 1-4473
    
    5-14-9699.24
    
    Pinnacle West
APS
    
    Arizona Corporation
Commission Order,
Decision No.
59943, dated
December 26, 1996,
including the Rules
regarding the
introduction of
retail competition
in Arizona
    
    99.1 to APS 1996 Form
10-K Report, File No. 1-4473
    
    3-28-9799.25
    
    Pinnacle West
APS
    
    Arizona Corporation
Commission Order,
Decision No. 61973,
dated October 6,
1999, approving
APS Settlement
Agreement
    
    10.1 to APS September 1999 10-Q Report,
File No. 1-4473
    
    11-15-9999.26
    
    Pinnacle West
APS
    
    Addendum to
Settlement
Agreement
    
    10.1 to Pinnacle Wests September 2000
Form 10-Q Report, File No. 1-8962
    
    11-14-0099.27
    
    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 1999 Form 10-Q
Report, File No. 1-4473
    
    11-15-99
 186




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    

Previously
Filed as Exhibit: 9a
    
    Effective99.28
    
    Pinnacle West
APS
    
    Track A Appeals
Issues  Principles
for Resolution
    
    99.1 to Pinnacle Wests November 15,
2002 Form
8-K, File No. 1-8962
    
    12-16-0299.29
    
    Pinnacle West
APS
    
    ACC Opinion and
Order dated
September 10, 2002,
Decision No. 65154
(Track A Order)
    
    99.1 to Pinnacle Wests September 10,
2002 Form
8-K Report, File No. 1-8962
    
    9-17-0299.30
    
    Pinnacle West
APS
    
    ACC Decision No.
65796 dated April
4, 2003 (Financing
Order)
    
    99.3 to Pinnacle Wests March 2003 Form
10-Q Report, File No. 1-8962
    
    5-15-0399.31
    
    Pinnacle West
    
    Risk Factors99.32
    
    APS
    
    Risk Factors99.33
    
    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
    
    8-18-0499.34
    
    Pinnacle West
APS
    
    Retail Electric Competition Rules
    
    10.1 to APS June 1998
Form 10-Q Report,
File No. 1-4473
    
    8-14-9899.35
    
    Pinnacle West
APS
    
    Arizona Public Service Company
Application filed with the Arizona Corporation Commission on
September 16, 2002
    
    99.2 to Pinnacle Wests September 10, 2002
Form 8-K Report, File No. 1-8962
    
    9-17-02
    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 14(c) 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. 187




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. PINNACLE WEST CAPITAL CORPORATION
(Registrant)Date:  March 16, 2005
    /s/ William J. Post(William J. Post, Chairman of theBoard of Directors and Chief
Executive Officer) Power of Attorney We, the undersigned directors and executive officers of Pinnacle West Capital Corporation,
hereby severally appoint Donald E. Brandt, Barbara M. Gomez and Nancy C. Loftin, and each of them,
our true and lawful attorneys with full power to them and each of them to sign for us, and in our
names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K
filed with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. 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
    
    March 16, 2005/s/ Jack E. Davis

(Jack E. Davis, President
and Chief Operating Officer)
    
    Director
    
    March 16, 2005/s/ Donald E. Brandt

(Donald E. Brandt,
Executive Vice President and
Chief Financial Officer)
    
    Principal Accounting Officer
and Principal Financial Officer
    
    March 16, 2005
 188




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Edward N. Basha, Jr.

(Edward N. Basha, Jr.)
    
    Director
    
    March 16, 2005/s/ Michael L. Gallagher

(Michael L. Gallagher)
    
    Director
    
    March 16, 2005/s/ Pamela Grant

(Pamela Grant)
    
    Director
    
    March 16, 2005/s/ Roy A. Herberger, Jr.

(Roy A. Herberger, Jr.)
    
    Director
    
    March 16, 2005/s/ Martha O. Hesse

(Martha O. Hesse)
    
    Director
    
    March 16, 2005/s/ William S. Jamieson, Jr.

(William S. Jamieson, Jr.)
    
    Director
    
    March 16, 2005/s/ Humberto S. Lopez

(Humberto S. Lopez)
    
    Director
    
    March 16, 2005/s/ Kathryn L. Munro

(Kathryn L. Munro)
    
    Director
    
    March 16, 2005/s/ Bruce J. Nordstrom

(Bruce J. Nordstrom)
    
    Director
    
    March 16, 2005/s/ William L. Stewart

(William L. Stewart)
    
    Director
    
    March 16, 2005
 189




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. ARIZONA PUBLIC SERVICE COMPANY
(Registrant)Date:  March 16, 2005
    /s/ Jack E. Davis(Jack E. Davis, President and ChiefExecutive Officer) Power of Attorney We, the undersigned directors and executive officers of Arizona Public Service Company, hereby
severally appoint Donald E. Brandt, Barbara M. Gomez and Nancy C. Loftin, and each of them, our
true and lawful attorneys with full power to them and each of them to sign for us, and in our names
in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed
with the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ William J. Post

(William J. Post, Chairman
of the Board of Directors )
    
    Director
    
    March 16, 2005/s/ Jack E. Davis

(Jack E. Davis, President
and Chief Executive Officer)
    
    Principal Executive Officer
and Director
    
    March 16, 2005/s/ Donald E. Brandt

(Donald E. Brandt,
Executive Vice President,
and Chief Financial Officer)
    
    Principal Financial Officer
    
    March 16, 2005/s/ Chris N. Froggatt

(Chris N. Froggatt,
Vice President and Controller)
    
    Principal Accounting Officer
    
    March 16, 2005
 190




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Edward N. Basha, Jr.

(Edward N. Basha, Jr.)
    
    Director
    
    March 16, 2005/s/ Michael L. Gallagher

(Michael L. Gallagher)
    
    Director
    
    March 16, 2005/s/ Pamela Grant

(Pamela Grant)
    
    Director
    
    March 16, 2005/s/ Roy A. Herberger, Jr.

(Roy A. Herberger, Jr.)
    
    Director
    
    March 16, 2005/s/ Martha O. Hesse

(Martha O. Hesse)
    
    Director
    
    March 16, 2005/s/ William S. Jamieson, Jr.

(William S. Jamieson, Jr.)
    
    Director
    
    March 16, 2005/s/ Humberto S. Lopez

(Humberto S. Lopez)
    
    Director
    
    March 16, 2005/s/ Kathryn L. Munro

(Kathryn L. Munro)
    
    Director
    
    March 16, 2005/s/ Bruce J. Nordstrom

(Bruce J. Nordstrom)
    
    Director
    
    March 16, 2005/s/ William L. Stewart

(William L. Stewart)
    
    Director
    
    March 16, 2005
 191




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##### Table of Contents



Exhibit Index Exhibit No.
    
    Registrant(s)
    
    Description10.1b
    
    Pinnacle West
APS
    
    2005 Officer and CEO Variable Incentive Plan10.79.2b
    
    Pinnacle West
APS
    
    Amendment to Agreement between APS and
James M. Levine effective as of 1-1-0510.95bd
    
    Pinnacle West
APS
    
    Performance Share Agreement under
the Pinnacle West Capital Corporation 2002
Long-Term Incentive Plan10.96bd
    
    Pinnacle West
APS
    
    Performance Share Agreement under
the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan10.97bd
    
    Pinnacle West
APS
    
    Performance Share Agreement under
the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan10.98bd
    
    Pinnacle West
APS
    
    Performance Accelerated Stock
Option Agreement under Pinnacle West Capital
Corporation 2002 Long-Term Incentive Plan10.99bd
    
    Pinnacle West
APS
    
    Stock Ownership Incentive Agreement
under Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan10.100
    
    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, 200210.101
    
    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 thereof10.102
    
    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, 200110.103
    
    Pinnacle West
APS
    
    Agreement for the Transfer and Use of
Wastewater and Effluent by and between APS,
SRP and PWE dated June 1, 200110.104
    
    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




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##### Table of Contents



Exhibit No.
    
    Registrant(s)
    
    Description10.105
    
    Pinnacle West
APS
    
    Operating Agreement for the Co-Ownership of
Wastewater Effluent dated November 16, 2000
by and between APS and SRP12.1
    
    Pinnacle West
    
    Ratio of Earnings to Fixed Charges12.2
    
    APS
    
    Ratio of Earnings to Fixed Charges21.1
    
    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
200299.31
    
    Pinnacle West
    
    Risk Factors99.32
    
    APS
    
    Risk Factors