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UNITED
STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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:
  þ o
 o þ
  o þ
 þ o
  þ o
 þ o
 o
   þ o o
  o o þ
 o þ
     PINNACLE WEST CAPITAL CORPORATION
    
    99,166,990 sharesARIZONA PUBLIC SERVICE COMPANY
    
    Common Stock, $2.50 par value,71,264,947 shares. Pinnacle WestCapital Corporation is the sole holderof Arizona Public Service CompanysCommon Stock.
   Arizona Public Service Company meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format allowed
under that General Instruction.




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TABLE OF CONTENTS
 PageGLOSSARY
    
    
    
    
    1PART I
    
    
    
    
    3Item 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    16Item 1B.
    
    Unresolved Staff Comments
    
    
    22Item 2.
    
    Properties
    
    
    23Item 3.
    
    Legal Proceedings
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Supplemental ItemExecutive Officers of Pinnacle West
    
    
    29PART II
    
    
    
    
    31Item 5.
    
    Market for Registrants Common Equity, Pinnacle West Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    31Item 6.
    
    Selected Financial Data
    
    
    32Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    34Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    65Item 8.
    
    Financial Statements and Supplementary Data
    
    
    66Item 9.
    
    Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    145Item 9A.
    
    Controls and Procedures
    
    
    145Item 9B.
    
    Other Information
    
    
    146PART III
    
    
    
    
    146Item 10.
    
    Directors and Executive Officers of Pinnacle West
    
    
    146Item 11.
    
    Executive Compensation
    
    
    146Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    146Item 13.
    
    Certain Relationships and Related Transactions
    
    
    149Item 14.
    
    Principal Accountant Fees and Services
    
    
    149PART IV
    
    
    
    
    150Item 15.
    
    Exhibits and Financial Statement Schedules
    
    
    150SIGNATURES
    
    
    
    
    190Exhibit 10.48bExhibit 10.64bExhibit 10.77bdExhibit 10.91bdExhibit 10.92bdExhibit 10.95Exhibit 10.96Exhibit 10.97Exhibit 10.107Exhibit 10.108Exhibit 12.1Exhibit 12.2Exhibit 12.3Exhibit 21.1Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 31.3Exhibit 31.4Exhibit 32.1Exhibit 32.2EX-99.29EX-99.30
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2




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INTRODUCTION
 Filing Format
   
    
    Pinnacle West ConsolidatedThis section describes the financial condition and
results of operations of Pinnacle West and its subsidiaries on a consolidated basis.
It includes discussions of Pinnacle Wests regulated utility and non-utility
operations. A substantial part of Pinnacle Wests revenues and earnings are derived
from its regulated utility, APS.
    
    APSThis section includes a detailed description of the results of operations and
contractual obligations of APS.
  
 PART I
 
 ITEM 1. BUSINESS
 OVERVIEW
 General
  3




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Business Segments





    
    the regulated electricity segment (75% of operating revenues in 2005), 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 real estate segment (11% of operating revenues in 2005), which consists of
SunCors real estate development and investment activities; and
    
    the marketing and trading segment (12% of operating revenues in 2005), which
consists of competitive energy business activities, including wholesale marketing and
trading and APS Energy Services commodity-related energy services.




APS Rate Proceedings




Employees




Available Information


www.pinnaclewest.com


4



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www.pinnaclewest.com,
 
    
    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.
   Forward-Looking Statements
  
    
    state and federal regulatory and legislative decisions and actions, including the
outcome and timing of APS retail rate proceedings pending before the ACC;
    
    the timely recovery of PSA deferrals;
    
    the ongoing restructuring of the electric industry, including the introduction of
retail electric competition in Arizona and decisions impacting wholesale competition;
    
    the outcome of regulatory, legislative and judicial proceedings, both current and
future, relating to the restructuring;
    
    market prices for electricity and natural gas;
    
    power plant performance and outages;
    
    transmission outages and constraints;
    
    weather variations affecting local and regional customer energy usage;
    
    customer growth and energy usage;
    
    regional economic and market conditions, including the results of litigation and
other proceedings resulting from the California energy situation, volatile fuel and
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purchased power 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;
    
    current credit ratings remaining in effect for any given period of time;
    
    our ability to compete successfully outside traditional regulated markets (including
the wholesale market);
    
    the performance of our marketing and trading activities due to volatile market
liquidity and any deteriorating counterparty credit and the use of derivative contracts
in our business (including the interpretation of the subjective and complex accounting
rules related to these contracts);
    
    changes in accounting principles generally accepted in the United States of America
and the interpretation of those principles;
    
    the performance of the stock market and the changing interest rate environment,
which affect the 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
   6
    Table of Contents    Wholesale
 General
  Regional Transmission Organizations
  BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
 General
   7    Table of Contents   Purchased Power and Generating Fuel
  2005 Energy Mix
  Coal Supply
 Cholla
 Four Corners
 Navajo Generating Station
  8
    Table of Contents    Natural Gas Supply
  Nuclear Fuel Supply
 Palo Verde Fuel Cycle
 
    
    mining and milling of uranium ore to produce uranium concentrates;
    
    conversion of uranium concentrates to uranium hexafluoride;
    
    enrichment of uranium hexafluoride;
    
    fabrication of fuel assemblies;
    
    utilization of fuel assemblies in reactors; and
    
    storage and disposal of spent nuclear fuel.
  Spent Nuclear Fuel and Waste Disposal
 Purchased Power
  9
    Table of Contents      Construction Program
  EstimateMajor facilities:
    
    2006
    
    
    2007
    
    
    2008Distribution
    
    $
    322
    
    
    $
    323
    
    
    $
    362Transmission
    
    
    120
    
    
    
    169
    
    
    
    203Generation
    
    
    184
    
    
    
    207
    
    
    
    279Other
    
    
    23
    
    
    
    16
    
    
    
    13Total
    
    $
    649
    
    
    $
    715
    
    
    $
    857
  10




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Environmental Matters
 EPA Environmental Regulation
 Regional Haze Rules
   Mercury
  11




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Federal Implementation Plan


Superfund nd


Manufactured Gas Plant Sites


Navajo Nation Environmental Issues








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West Phoenix Power Plant
  Water Supply
    13




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Federal Energy Legislation
  BUSINESS OF SUNCOR DEVELOPMENT COMPANY
    14




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BUSINESS OF PINNACLE WEST ENERGY CORPORATION
   BUSINESS OF APS ENERGY SERVICES COMPANY, INC.
   BUSINESS OF EL DORADO INVESTMENT COMPANY
  15




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ITEM 1A. RISK FACTORS
  We are subject to comprehensive government regulation by several federal, state and local
regulatory agencies that significantly affect our business and our results of operations.
   We cannot predict the outcome of APS retail rate proceedings pending before the ACC.
  We are subject to numerous environmental laws and regulations that may increase our cost of
operations, impact our business plans, or expose us to environmental liabilities.
  16




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There are inherent risks in the operation of nuclear facilities, such as environmental, health
and financial risks and the risk of terrorist attack.
   17




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




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Our ability to meet our debt service obligations could be adversely affected because our debt
securities are structurally subordinated to the debt securities and other obligations of our
subsidiaries.
  If we are not able to access capital at competitive rates, our ability to implement our
financial strategy will be adversely affected.
  
    
    an economic downturn;
    
    the bankruptcy of an unrelated energy company;
    
    increased market prices for electricity and gas;
    
    terrorist attacks or threatened attacks on our facilities or those of unrelated
energy companies; or
    
    the overall health of the utility industry.
  
    
    increasing the cost of future debt financing;
    
    increasing our vulnerability to adverse economic and industry conditions;
    
    requiring us to dedicate a substantial portion of our cash flow from operations to
payments on our debt, which would reduce funds available to us for operations, future
business opportunities or other purposes; and
    
    placing us at a competitive disadvantage compared to our competitors that have less
debt.
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A further reduction in our credit ratings could materially and adversely affect our business,
financial condition and results of operations.
  The use of derivative contracts in the normal course of our business and changing interest
rates and market conditions could result in financial losses that negatively impact our results of
operations.
    Actual results could differ from estimates used to prepare our financial statements.
  20




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
    
    Regulatory Accounting  Regulatory accounting allows for the actions of regulators,
such as the ACC and the FERC, to be reflected in our financial statements. Their
actions may cause us to capitalize costs that would otherwise be included as an expense
in the current period by unregulated companies. If future recovery of costs ceases to
be probable, the assets would be written off as a charge in current
period earnings. A major component of our regulatory assets is the retail fuel and purchased power costs
deferred under the PSA. APS defers for future rate recovery 90% of the difference
between actual retail fuel and purchased power costs and the amount of such costs
currently included in base rates. We had $324 million, including $173 million related
to the PSA, of regulatory assets on the Consolidated Balance Sheets at December 31,
2005. Included in the $173 million is approximately $45 million related to the 2005
unplanned Palo Verde outages, which currently are the subject of inquiry by the ACC.
Since December 25, 2005, Palo Verde Unit 1 has been operating at reduced power levels
due to a non-safety related acoustic impact in one of the units shutdown cooling
lines. Unit 1 is currently operating at approximately
25% power. APS estimates that these reduced power levels and a
planned Unit 1 outage to resolve the Unit 1 issue will
result in additional PSA deferrals of approximately $85 million
pretax in
2006. See Notes 1 and 3 for more information about
regulatory assets and liabilities, APS pending retail rate proceedings, and the PSA.
    
    Pensions and Other Postretirement Benefit Accounting  Changes in our actuarial
assumptions used in calculating our pension and other postretirement benefit liability
and expense can have a significant impact on our earnings and financial position. The
most relevant actuarial assumptions are the discount rate used to measure our liability
and net periodic cost, the expected long-term rate of return on plan assets used to
estimate earnings on invested funds over the long-term, and the assumed healthcare cost
trend rates. We review these assumptions on an annual basis and adjust them as
necessary.
    
    Derivative Accounting  Derivative accounting requires evaluation of rules that are
complex and subject to varying interpretations. Our evaluation of these rules, as they
apply to our contracts, will determine whether we use accrual accounting (for contracts
designated as normal) or fair value (mark-to-market) accounting. Mark-to-market
accounting requires that changes in the fair value are recognized periodically in
income unless certain hedge criteria are met. For fair value hedges, the gain or loss
on the derivative as well as the offsetting loss or gain on the hedged item associated
with the hedged risk are recognized in earnings. For cash flow hedges, the effective
portion of changes in the fair value of the derivative are recognized in common stock


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equity (as a component of other comprehensive income (loss)) and are recognized in
earnings when the related transaction occurs.
 The market price of our common stock may be volatile.
  
    
    variations in our quarterly operating results;
    
    operating results that vary from the expectations of management, securities analysts
and investors;
    
    changes in expectations as to our future financial performance, including financial
estimates by securities analysts and investors;
    
    developments generally affecting industries in which we operate, particularly the
energy distribution and energy generation industries;
    
    announcements by us or our competitors of significant contracts, acquisitions, joint
marketing relationships, joint ventures or capital commitments;
    
    announcements by third parties of significant claims or proceedings against us;
    
    favorable or adverse regulatory developments;
    
    our dividend policy;
    
    future sale of our equity or equity-linked securities; and
    
    general domestic and international economic conditions.
  We may enter into credit and other agreements from time to time that restrict our ability to
pay dividends.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
 .
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ITEM 2. PROPERTIES
 Capacity
  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:1Two steam units at Ocotillo and two steam units at Saguaro
    
    
    430,000Twenty-two combustion turbine units
    
    
    993,000Seven combined cycle units
    
    
    1,965,000Subtotal
    
    
    3,388,000Nuclear:29.1% owned or leased Units 1, 2, and 3 at Palo Verde
    
    
    1,107,000Solar
    
    
    5,715Total
    
    
    6,212,715
 
 1
    
    APS purchased a ten-unit (42,000 kW each) combustion turbine site (Sundance) on
May 15, 2005. Reserve Margin
   23




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Plant Sites Leased from Navajo Nation
  Palo Verde Nuclear Generating Station
 Regulatory
   Nuclear Decommissioning Costs
   24




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Palo Verde Liability and Insurance Matters
  Property Not Held in Fee or Subject to Encumbrances
 Jointly-Owned Facilities
  Percent OwnedGenerating facilities (a):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 (b)
    
    
    62.6
    %(c)Transmission facilities:ANPP 500KV System
    
    
    35.8
    %(c)Navajo Southern System
    
    
    31.4
    %(c)Palo Verde  Yuma 500KV System
    
    
    23.9
    %(c)Four Corners Switchyards
    
    
    27.5
    %(c)Phoenix  Mead System
    
    
    17.1
    %(c)Palo Verde  Estrella 500KV System
    
    
    55.5
    %(c)Harquahala
    
    
    80.0
    %(c)
 
 (a)
    
    This table does not reflect Pinnacle West Energys 75% interest in Silverhawk at December 31,
2005. Pinnacle West Energy sold this interest to NPC on January 10, 2006.(b)
    
    PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common
facilities at Cholla are jointly-owned.(c)
    
    Weighted-average of interests. Palo Verde Leases
  25




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Transmission Access
  Other Information Regarding Our Properties
    Information Regarding SunCors Properties
  26




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APS Service Territory Map
  
  27




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ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
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SUPPLEMENTAL ITEM.
 
 EXECUTIVE OFFICERS OF PINNACLE WEST
  Name
    
    Age at March 1, 2006
    
    Position(s) at March 1, 2006William J. Post
    
    
    55
    
    
    Chairman of the Board and
Chief Executive Officer (1)Jack E. Davis
    
    
    59
    
    
    President and Chief Operating
Officer, and President and
Chief Executive Officer, APS
(1)Donald E. Brandt
    
    
    51
    
    
    Executive Vice President and
Chief Financial OfficerArmando B. Flores
    
    
    62
    
    
    Executive Vice President, Corporate Business Services, APSChris N. Froggatt
    
    
    48
    
    
    Vice President and
Controller, APSBarbara M. Gomez
    
    
    51
    
    
    Vice President and TreasurerJames M. Levine
    
    
    56
    
    
    Executive Vice President,
Generation, APS and
President, Pinnacle West
EnergyNancy C. Loftin
    
    
    52
    
    
    Vice President, General
Counsel and SecretaryDonald G. Robinson
    
    
    52
    
    
    Vice President, Planning, APSSteven M. Wheeler
    
    
    57
    
    
    Executive Vice President,
Customer Service and
Regulation, APS
 
 (1)
    
    Member of the Board of Directors.  29




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
 STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
   Dividends2005
    
    High
    
    Low
    
    Close
    
    Per Share1st Quarter
    
    $
    44.87
    
    
    $
    40.99
    
    
    $
    42.51
    
    
    $
    0.4752nd Quarter
    
    
    45.34
    
    
    
    41.29
    
    
    
    44.45
    
    
    
    0.4753rd Quarter
    
    
    46.68
    
    
    
    43.13
    
    
    
    44.08
    
    
    
    0.4754th Quarter
    
    
    44.97
    
    
    
    39.81
    
    
    
    41.35
    
    
    
    0.500
 Dividends2004
    
    High
    
    Low
    
    Close
    
    Per 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
   Common Stock Dividends
(Dollars in Thousands)
 Quarter
    
    2005
    
    20041st Quarter
    
    $
    42,500
    
    
    $
    42,5002nd Quarter
    
    
    
    
    
    
    42,5003rd Quarter
    
    
    
    
    
    
    42,5004th Quarter
    
    
    127,500
    
    
    
    42,500
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ITEM 6. SELECTED FINANCIAL DATA
 PINNACLE WEST CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
 2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(dollars in thousands, except per share amounts)OPERATING RESULTSOperating revenues:Regulated electricity segment
    
    $
    2,237,145
    
    
    $
    2,035,247
    
    
    $
    1,978,075
    
    
    $
    1,890,391
    
    
    $
    1,984,305Marketing and trading segment (a)
    
    
    351,558
    
    
    
    400,628
    
    
    
    391,196
    
    
    
    286,879
    
    
    
    469,784Real estate segment (a)
    
    
    338,031
    
    
    
    350,315
    
    
    
    361,604
    
    
    
    201,081
    
    
    
    168,908Other revenues
    
    
    61,221
    
    
    
    42,816
    
    
    
    27,929
    
    
    
    26,899
    
    
    
    11,771Total operating revenues
    
    $
    2,987,955
    
    
    $
    2,829,006
    
    
    $
    2,758,804
    
    
    $
    2,405,250
    
    
    $
    2,634,768Income from continuing operations (b)
    
    
    223,163
    
    
    
    246,590
    
    
    
    225,384
    
    
    
    236,563
    
    
    
    327,367Discontinued operations  net of income
taxes (c)
    
    
    (46,896
    )
    
    
    (3,395
    )
    
    
    15,195
    
    
    
    (21,410
    )
    
    
    Cumulative effect of change in accounting
 net of income taxes (d) (e)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,745
    )
    
    
    (15,201
    )Net income
    
    $
    176,267
    
    
    $
    243,195
    
    
    $
    240,579
    
    
    $
    149,408
    
    
    $
    312,166COMMON STOCK DATABook value per share  year-end
    
    $
    34.58
    
    
    $
    32.14
    
    
    $
    30.97
    
    
    $
    29.40
    
    
    $
    29.46Earnings (loss) per weighted average
common share outstanding:Continuing operations  basic
    
    $
    2.31
    
    
    $
    2.70
    
    
    $
    2.47
    
    
    $
    2.79
    
    
    $
    3.86Discontinued operations (c)
    
    
    (0.48
    )
    
    
    (0.04
    )
    
    
    0.17
    
    
    
    (0.26
    )
    
    
    Cumulative effect of change
in accounting (d) (e)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.77
    )
    
    
    (0.18
    )Net income  basic
    
    $
    1.83
    
    
    $
    2.66
    
    
    $
    2.64
    
    
    $
    1.76
    
    
    $
    3.68Continuing operations  diluted
    
    $
    2.31
    
    
    $
    2.69
    
    
    $
    2.47
    
    
    $
    2.78
    
    
    $
    3.85Net income  diluted
    
    $
    1.82
    
    
    $
    2.66
    
    
    $
    2.63
    
    
    $
    1.76
    
    
    $
    3.68Dividends declared per share
    
    $
    1.925
    
    
    $
    1.825
    
    
    $
    1.725
    
    
    $
    1.625
    
    
    $
    1.525Indicated annual dividend rate
per share  year-end
    
    $
    2.00
    
    
    $
    1.90
    
    
    $
    1.80
    
    
    $
    1.70
    
    
    $
    1.60Weighted-average common shares
outstanding  basic
    
    
    96,483,781
    
    
    
    91,396,904
    
    
    
    91,264,696
    
    
    
    84,902,946
    
    
    
    84,717,649Weighted-average common shares
outstanding  diluted
    
    
    96,589,949
    
    
    
    91,532,473
    
    
    
    91,405,134
    
    
    
    84,963,921
    
    
    
    84,930,140BALANCE SHEET DATATotal assets
    
    $
    11,322,645
    
    
    $
    9,896,747
    
    
    $
    9,519,042
    
    
    $
    9,139,157
    
    
    $
    8,529,124Liabilities and equity:Long-term debt less current maturities
    
    $
    2,608,455
    
    
    $
    2,584,985
    
    
    $
    2,616,585
    
    
    $
    2,743,741
    
    
    $
    2,673,078Other liabilities
    
    
    5,289,226
    
    
    
    4,361,566
    
    
    
    4,072,678
    
    
    
    3,709,263
    
    
    
    3,356,723Total liabilities
    
    
    7,897,681
    
    
    
    6,946,551
    
    
    
    6,689,263
    
    
    
    6,453,004
    
    
    
    6,029,801Common stock equity
    
    
    3,424,964
    
    
    
    2,950,196
    
    
    
    2,829,779
    
    
    
    2,686,153
    
    
    
    2,499,323Total liabilities and equity
    
    $
    11,322,645
    
    
    $
    9,896,747
    
    
    $
    9,519,042
    
    
    $
    9,139,157
    
    
    $
    8,529,124
 
 (a)
    
    Includes reclassifications of revenue in 2004 and 2003 related to items accounted for as
discontinued operations of SunCor and Silverhawk. See Note 22 of Notes to Pinnacle Wests
Consolidated Financial Statements in Item 8.(b)
    
    Includes regulatory disallowance of $84 million after tax in 2005. See Note 3 of Notes to
Pinnacle Wests Consolidated Financial Statements in Item 8.(c)
    
    Amounts related to Silverhawk, SunCor and NAC discontinued operations. Prior year amounts
have been reclassified to discontinued operations to conform to current year presentation.
See Note 22 of Notes to Pinnacle Wests Consolidated Financial Statements in Item 8.(d)
    
    Represents change in accounting standards related to energy trading activities in 2002.(e)
    
    Represents change in accounting standards related to derivatives in 2001. 32




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SELECTED FINANCIAL DATA
ARIZONA PUBLIC SERVICE COMPANY
 2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(dollars in thousands)OPERATING RESULTSElectric operating revenues:Regulated electricity
    
    $
    2,244,951
    
    
    $
    2,051,602
    
    
    $
    1,999,390
    
    
    $
    1,902,112
    
    
    $
    1,984,305Marketing and trading
    
    
    25,842
    
    
    
    145,519
    
    
    
    105,541
    
    
    
    34,054
    
    
    
    367,793Total electric operating revenues
    
    
    2,270,793
    
    
    
    2,197,121
    
    
    
    2,104,931
    
    
    
    1,936,166
    
    
    
    2,352,098Fuel and purchased power costs:Regulated electricity
    
    
    656,654
    
    
    
    612,300
    
    
    
    606,251
    
    
    
    438,141
    
    
    
    649,405Marketing and trading
    
    
    32,328
    
    
    
    150,954
    
    
    
    97,180
    
    
    
    32,662
    
    
    
    132,544Operating expenses
    
    
    1,200,198
    
    
    
    1,104,886
    
    
    
    1,103,342
    
    
    
    1,136,363
    
    
    
    1,171,171Operating income
    
    
    381,613
    
    
    
    328,981
    
    
    
    298,158
    
    
    
    329,000
    
    
    
    398,978Other income (deductions)
    
    
    (69,171
    )
    
    
    15,328
    
    
    
    26,347
    
    
    
    (8,041
    )
    
    
    (79
    )Interest deductions  net
    
    
    141,963
    
    
    
    144,682
    
    
    
    143,568
    
    
    
    121,616
    
    
    
    118,211Income before cumulative effect
adjustment
    
    
    170,479
    
    
    
    199,627
    
    
    
    180,937
    
    
    
    199,343
    
    
    
    280,688Cumulative effect of change in
accounting  net of income
taxes (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,201
    )Net income
    
    $
    170,479
    
    
    $
    199,627
    
    
    $
    180,937
    
    
    $
    199,343
    
    
    $
    265,487BALANCE SHEET DATATotal assets
    
    $
    9,707,441
    
    
    $
    8,098,552
    
    
    $
    7,722,533
    
    
    $
    7,122,238
    
    
    $
    6,815,458Capital structure:Common stock equity
    
    $
    2,985,225
    
    
    $
    2,232,402
    
    
    $
    2,203,630
    
    
    $
    2,159,312
    
    
    $
    2,150,690Long-term debt less current
maturities
    
    
    2,479,703
    
    
    
    2,267,094
    
    
    
    2,135,606
    
    
    
    2,217,340
    
    
    
    1,949,074Total capitalization
    
    
    5,464,928
    
    
    
    4,499,496
    
    
    
    4,339,236
    
    
    
    4,376,652
    
    
    
    4,099,764Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,162Current maturities of long-term
debt
    
    
    85,620
    
    
    
    451,247
    
    
    
    487,067
    
    
    
    3,503
    
    
    
    125,451Total
    
    $
    5,550,548
    
    
    $
    4,950,743
    
    
    $
    4,826,303
    
    
    $
    4,380,155
    
    
    $
    4,396,377
 
 (a)
    
    Change in accounting standards related to derivatives. 33




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTRODUCTION
  OVERVIEW
   
    
    a general retail rate case pursuant to which APS is requesting a 21.3%, or $453.9
million, increase in its annual retail electricity revenues effective no later than
December 31, 2006;
    
    an application for an emergency interim rate increase of $299 million, or
approximately 14%, to be effective April 1, 2006 (the increase would accelerate
recovery of the fuel and purchased power component of APS general rate case and is not
an additional increase and would be subject to refund); and
    
    an application for a temporary rate increase of approximately 2.6%, through two
separate PSA surcharges, to recover $59.9 million in retail fuel and purchased power
costs deferred by APS in 2005 under the PSA.
   34




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##### Table of Contents



PINNACLE WEST CONSOLIDATED 
EARNINGS CONTRIBUTION BY BUSINESS SEGMENT
  
    
    our regulated electricity segment, which consists of traditional regulated retail
and wholesale electricity businesses (primarily electric service to Native Load
customers) and related activities and includes electricity generation, transmission and
distribution;
    
    our real estate segment, which consists of SunCors real estate development and
investment activities; and
    
    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.
 35




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Regulated electricity
    
    $
    167
    
    
    $
    152
    
    
    $
    170Real estate
    
    
    35
    
    
    
    40
    
    
    
    45Marketing and trading
    
    
    16
    
    
    
    29
    
    
    
    8Other (a)
    
    
    5
    
    
    
    26
    
    
    
    2Income from continuing operations
    
    
    223
    
    
    
    247
    
    
    
    225Discontinued operations  net of tax:Real estate (b)
    
    
    17
    
    
    
    4
    
    
    
    10Marketing and trading (c)
    
    
    (67
    )
    
    
    (12
    )
    
    
    1Other (d)
    
    
    3
    
    
    
    4
    
    
    
    5Net income
    
    $
    176
    
    
    $
    243
    
    
    $
    241
 
 (a)
    
    Includes a $21 million after-tax gain in 2004 related to the sale of a limited
partnership interest in the Phoenix Suns.(b)
    
    Primarily relates to sales of commercial properties.(c)
    
    See Sale of Silverhawk below.(d)
    
    Relates to the 2004 sale of NAC. PINNACLE
WEST CONSOLIDATED  RESULTS OF OPERATIONS
 General
  Sale of Silverhawk
  36




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Deferred Fuel and Purchased Power Costs
    2005 Compared with 2004
  
    
    Regulated Electricity Segment  Income from continuing operations increased
approximately $15 million primarily due to deferred fuel and purchased power costs; a
retail price increase effective April 1, 2005; higher retail sales volumes due to
 37




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##### Table of Contents



customer growth; lower depreciation due to lower depreciation rates; lower
regulatory asset amortization; and effects of weather on retail sales. These
positive factors were partially offset by the regulatory disallowance of plant costs
in accordance with the APS retail rate case settlement; higher fuel and purchased
power costs primarily due to higher prices and more plant outage days; higher
operations and maintenance expense related to generation and customer service; and
higher property taxes due to increased plant in service.
    
    Real Estate Segment  Income from continuing operations decreased approximately $5
million primarily due to decreased parcel sales, partially offset by increased margins
on home sales. Income from discontinued real estate operations increased $13 million
due to higher commercial property sales.
    
    Marketing and Trading Segment  Income from continuing operations decreased
approximately $13 million primarily due to lower unit margins on competitive retail
sales in California; the absence of Off-System Sales that we began reporting in the
regulated electricity segment in April 2005; and lower mark-to-market gains on
contracts for future delivery.
    
    Other Segment  Income from continuing operations decreased approximately $21
million primarily due to an after-tax gain related to the sale of a limited partnership
interest in the Phoenix Suns recorded in the prior year.
 38




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Increase (Decrease)Pretax
    
    
    After TaxRegulated electricity segment gross margin:Deferred fuel and purchased power costs (see
discussion above)
    
    $
    171
    
    
    $
    104Retail price increase effective April 1, 2005
    
    
    65
    
    
    
    40Higher retail sales volumes due to customer growth,
excluding weather effects
    
    
    58
    
    
    
    35Effects of weather on retail sales
    
    
    14
    
    
    
    9Higher fuel and purchased power costs primarily due to
higher prices and more plant outage days
    
    
    (126
    )
    
    
    (77
    )Miscellaneous items, net
    
    
    (8
    )
    
    
    (5
    )Net increase in regulated electricity segment gross margin
    
    
    174
    
    
    
    106Marketing and trading segment gross margin:Lower unit margins on competitive retail sales in California
    
    
    (13
    )
    
    
    (8
    )Lower realized margins on wholesale sales primarily
due to the absence of sales that we began reporting in the
regulated segment in April 2005
    
    
    (4
    )
    
    
    (3
    )Lower mark-to-market gains on contracts for future delivery
due to changes in forward prices
    
    
    (4
    )
    
    
    (2
    )Net decrease in marketing and trading segment
gross margin
    
    
    (21
    )
    
    
    (13
    )Net increase in gross margin for regulated electricity
and marketing and trading segments
    
    
    153
    
    
    
    93Regulatory disallowance, in accordance with the APS retail rate
case settlement
    
    
    (139
    )
    
    
    (84
    )Lower real estate segment contribution primarily related to
decreased parcel sales, partially offset by increased
margins on home sales
    
    
    (8
    )
    
    
    (5
    )Lower other income primarily due to sale of limited partnership
interest in Phoenix Suns recorded in the prior year,
partially offset by higher interest income
    
    
    (30
    )
    
    
    (18
    )Operations and maintenance increases primarily due to:Generation costs, including maintenance and overhauls
    
    
    (20
    )
    
    
    (12
    )Customer service costs, including regulatory demand-side
management programs and planned maintenance
    
    
    (20
    )
    
    
    (12
    )Miscellaneous items, net
    
    
    (4
    )
    
    
    (2
    )Depreciation and amortization decreases primarily due to:Lower regulatory asset amortization
    
    
    22
    
    
    
    13Lower depreciation rates, partially offset by
increased depreciable assets
    
    
    22
    
    
    
    13Higher property taxes primarily due to increased plant in service
    
    
    (11
    )
    
    
    (7
    )Miscellaneous items, net
    
    
    2
    
    
    
    (3
    )Net decrease in income from continuing operations
    
    $
    (33
    )
    
    
    (24
    )Discontinued operations related to:Sale of Silverhawk (see discussion above)
    
    
    
    
    
    
    (56
    )Sales of real estate assets and other
    
    
    
    
    
    
    13Net decrease in net income
    
    
    
    
    
    $
    (67
    )
 39




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##### Table of Contents



Regulated Electricity Segment Revenues
  
    
    an $81 million increase in retail revenues related to customer growth,
excluding weather effects;
    
    a $65 million increase in retail revenues due to a price increase
effective April 1, 2005;
    
    a $40 million increase in Off-System Sales primarily resulting from
sales previously reported in the marketing and trading segment that were classified
beginning in April 2005 as sales in the regulated electricity segment in accordance
with the APS retail rate case settlement;
    
    an $11 million increase in retail revenues related to weather; and
    
    a $5 million increase due to miscellaneous factors.
 Marketing and Trading Segment Revenues
  
    
    a $40 million decrease in Off-System Sales due to the absence of sales
previously reported in the marketing and trading segment that were classified beginning
in April 2005 as sales in the regulated electricity segment in accordance with the APS
retail rate case settlement;
    
    a $4 million decrease in mark-to-market gains on contracts for future
delivery due to changes in forward prices;
    
    a $3 million decrease in marketing and trading revenues due to lower
sales volumes; and
    
    a $2 million decrease from lower volumes of competitive retail sales in California.
 Real Estate Revenues
  Other Revenues
  40




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##### Table of Contents



2004 Compared with 2003
  
    
    Regulated Electricity Segment  Income from continuing operations decreased
approximately $18 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.
    
    Real Estate Segment  Income from continuing operations decreased approximately $5
million due to decreased asset sales, partially offset by increased land sales. Income
from discontinued operations decreased $6 million primarily due to the 2003 gain on the
sale of SunCors water utility company (see Note 22).
    
    Marketing and Trading Segment  Income from continuing operations increased
approximately $21 million primarily due to higher forward and realized prices for
wholesale electricity, partially offset by lower margins in California by APS Energy
Services. Income from discontinued operations decreased $13 million due to Silverhawk
(see Note 22).
    
    Other Segment  Income from continuing operations increased approximately $24
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.
 41




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##### Table of Contents



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 Off-System Sales due to higher sales volumes and higher unit
margins
    
    
    10
    
    
    
    6Lower 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
    
    
    34
    
    
    
    21Net increase in gross margin for regulated electricity and marketing and
trading segments
    
    
    41
    
    
    
    25Lower 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
    
    
    (44
    )
    
    
    (26
    )Interest expense net of capitalized financing costs, decreases (increases):New power plants in service
    
    
    (16
    )
    
    
    (10
    )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
    
    
    (4
    )
    
    
    (2
    )Increased delivery and other assets
    
    
    (20
    )
    
    
    (12
    )Higher property taxes due to increased plant in service
    
    
    (10
    )
    
    
    (6
    )Lower income tax credits
    
    
    
    
    
    
    (17
    )Miscellaneous items, net
    
    
    3
    
    
    
    8Net increase in income from continuing operations
    
    $
    55
    
    
    
    22Discontinued operations (see Note 22)
    
    
    
    
    
    
    (20
    )Net increase in net income
    
    
    
    
    
    $
    2
  42




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##### Table of Contents



Regulated Electricity Segment Revenues
  
    
    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
  
    
    $28 million in higher mark-to-market gains for future-period deliveries
primarily as a result of higher forward prices for wholesale electricity;
    
    a $25 million decrease from lower competitive retail sales volumes in
California by APS Energy Services;
    
    $20 million of higher energy trading revenues on realized sales of
electricity primarily due to higher electricity prices; and
    
    a $14 million decrease in Off-System Sales primarily due to lower
wholesale unit margins and lower sales volumes.
 Other Revenues
  LIQUIDITY AND CAPITAL RESOURCES
 Capital Needs and Resources  Pinnacle West Consolidated
 Capital Expenditure Requirements
  43




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##### Table of Contents



CAPITAL EXPENDITURES
 Actual
    
    
    Estimated2005
    
    
    2006
    
    
    2007
    
    
    2008APSDistribution
    
    $
    325
    
    
    $
    322
    
    
    $
    323
    
    
    $
    362Transmission
    
    
    92
    
    
    
    120
    
    
    
    169
    
    
    
    203Generation (a)
    
    
    356
    
    
    
    184
    
    
    
    207
    
    
    
    279Other (b)
    
    
    36
    
    
    
    23
    
    
    
    16
    
    
    
    13Subtotal
    
    
    809
    
    
    
    649
    
    
    
    715
    
    
    
    857SunCor (c)
    
    
    106
    
    
    
    232
    
    
    
    142
    
    
    
    119Other
    
    
    13
    
    
    
    6
    
    
    
    2
    
    
    
    6Total
    
    $
    928
    
    
    $
    887
    
    
    $
    859
    
    
    $
    982
 
 (a)
    
    Includes $185 million in 2005 for the acquisition of the Sundance Plant.(b)
    
    Primarily information systems and facilities projects.(c)
    
    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.    44




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##### Table of Contents



Contractual Obligations
  2007-
    
    
    2009-2006
    
    
    2008
    
    
    2010
    
    
    Thereafter
    
    
    TotalLong-term debt payments,
including interest: (a)APS
    
    $
    219
    
    
    $
    259
    
    
    $
    480
    
    
    $
    3,350
    
    
    $
    4,308Pinnacle West
    
    
    312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312SunCor
    
    
    9
    
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    152Total long-term debt payments,
including interest
    
    
    540
    
    
    
    402
    
    
    
    480
    
    
    
    3,350
    
    
    
    4,772Short-term debt payments,
including interest (b)
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Capital lease payments
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    8Operating lease payments
    
    
    74
    
    
    
    144
    
    
    
    133
    
    
    
    303
    
    
    
    654Minimum pension funding
requirement (c)
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Purchased power and fuel
commitments (d)
    
    
    316
    
    
    
    419
    
    
    
    256
    
    
    
    908
    
    
    
    1,899Purchase obligations (e)
    
    
    25
    
    
    
    9
    
    
    
    
    
    
    
    75
    
    
    
    109Nuclear decommissioning funding
requirements
    
    
    21
    
    
    
    42
    
    
    
    46
    
    
    
    259
    
    
    
    368Total contractual commitments
    
    $
    1,031
    
    
    $
    1,018
    
    
    $
    917
    
    
    $
    4,897
    
    
    $
    7,863
 
 (a)
    
    The long-term debt matures at various dates through 2035 and bears interest principally at
fixed rates. Interest on variable-rate long-term debt is determined by using the rates at
December 31, 2005 (see Note 6).(b)
    
    The short-term debt matures within 12 months and is primarily related to short-term loans at
SunCor. These loans are made up of multiple notes primarily with variable interest rates
based on prime plus 1.75% or LIBOR plus 2.25% and 2.50% at December 31, 2005 (see Note 5).(c)
    
    Future pension contributions are not determinable for time periods after 2006.(d)
    
    Our fuel and purchased power commitments include purchases of coal, electricity, natural gas
and nuclear fuel (see Note 11).(e)
    
    These contractual obligations include commitments for capital expenditures and other
obligations. Off-Balance Sheet Arrangements
   45




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##### Table of Contents



Guarantees and Letters of Credit
  Credit Ratings
  Moodys
    
    Standard & PoorsPinnacle WestSenior unsecured
    
    Baa2
    
    BB+Commercial paper
    
    P
    -2
    
    
    
    A-3Outlook
    
    Under Review for
    
    StablePossible DowngradeAPSSenior unsecured
    
    Baa1
    
    BBB-Secured lease
obligation bonds
    
    Baa1
    
    BBB-Commercial paper
    
    P
    -2
    
    
    
    A-3Outlook
    
    Under Review for
    
    StablePossible Downgrade
 Debt Provisions
  46




---



##### Table of Contents



Capital Needs and Resources
 Pinnacle West (Parent Company)
    47




---



##### Table of Contents



APS
   48




---



##### Table of Contents



Pinnacle West Energy
  49




---



##### Table of Contents



Other Subsidiaries
     CRITICAL ACCOUNTING POLICIES
  Regulatory Accounting
  50




---



##### Table of Contents



Pensions and Other Postretirement Benefit Accounting
   Increase(Decrease)Impact onProjected
    
    
    Impact on
    
    
    Impact onBenefit
    
    
    Pension
    
    
    PensionActuarial Assumption (a)
    
    Obligation
    
    
    Liability
    
    
    ExpenseDiscount rate:Increase 1%
    
    $
    (207
    )
    
    $
    (170
    )
    
    $
    (8
    )Decrease 1%
    
    
    237
    
    
    
    195
    
    
    
    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.  51




---



##### Table of Contents



Increase(Decrease)Impact on Accumulated
    
    
    Impact on OtherOther Postretirement
    
    
    PostretirementActuarial Assumption (a)
    
    Benefit Obligation
    
    
    Benefit ExpenseDiscount rate:Increase 1%
    
    $
    (84
    )
    
    $
    (4
    )Decrease 1%
    
    
    106
    
    
    
    5Health care cost trend
rate (b):Increase 1%
    
    
    100
    
    
    
    7Decrease 1%
    
    
    (79
    )
    
    
    (6
    )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.(b)
    
    This assumes a 1% change in the initial and ultimate health care cost trend rate.  Derivative Accounting
   52




---



##### Table of Contents



PINNACLE WEST CONSOLIDATED  FACTORS AFFECTING
OUR FINANCIAL OUTLOOK
 Factors Affecting Operating Revenues, Fuel and Purchased Power Costs
 General
 Retail Rate Proceedings
 Fuel and Purchased Power Costs
 Customer and Sales Growth
  Weather
 Wholesale Power Market Conditions
 53




---



##### Table of Contents



Other Factors Affecting Financial Results
 Operations and Maintenance Expenses
 Depreciation and Amortization Expenses
 Property Taxes
 Interest Expense
 Retail Competition
 Subsidiaries
  General
 Market Risks
  54




---



##### Table of Contents



Interest Rate and Equity Risk
   Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2005
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2006
    
    
    7.11
    %
    
    $
    15,673
    
    
    
    5.38
    %
    
    $
    350
    
    
    
    6.47
    %
    
    $
    386,6242007
    
    
    
    
    
    
    
    
    
    
    5.38
    %
    
    
    350
    
    
    
    5.90
    %
    
    
    1,2712008
    
    
    
    
    
    
    
    
    
    
    5.93
    %
    
    
    128,178
    
    
    
    5.85
    %
    
    
    1,3182009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.73
    %
    
    
    1,0142010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.69
    %
    
    
    1,077Years thereafter
    
    
    
    
    
    
    
    
    
    
    3.25
    %
    
    
    565,855
    
    
    
    5.79
    %
    
    
    1,918,026Total
    
    
    
    
    
    $
    15,673
    
    
    
    
    
    
    $
    694,733
    
    
    
    
    
    
    $
    2,309,330Fair value
    
    
    
    
    
    $
    15,673
    
    
    
    
    
    
    $
    694,733
    
    
    
    
    
    
    $
    2,326,235
 Variable-Rate
    
    
    Fixed-RateShort-Term Debt
    
    
    Long-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest
    
    
    
    
    
    
    Interest2004
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2005
    
    
    4.21
    %
    
    $
    71,030
    
    
    
    1.99
    %
    
    $
    165,447
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    1.89
    %
    
    
    565,860
    
    
    
    4.79
    %
    
    
    1,669,901Total
    
    
    
    
    
    $
    71,030
    
    
    
    
    
    
    $
    739,821
    
    
    
    
    
    
    $
    2,470,440Fair value
    
    
    
    
    
    $
    71,030
    
    
    
    
    
    
    $
    740,271
    
    
    
    
    
    
    $
    2,574,608
 55




---



##### Table of Contents



Variable-Rate
    
    
    Fixed-RateLong-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest2005
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2006
    
    
    
    
    
    $
    
    
    
    
    6.71
    %
    
    $
    86,1652007
    
    
    
    
    
    
    
    
    
    
    5.76
    %
    
    
    1,0752008
    
    
    
    
    
    
    
    
    
    
    5.74
    %
    
    
    1,2712009
    
    
    
    
    
    
    
    
    
    
    5.70
    %
    
    
    1,0052010
    
    
    
    
    
    
    
    
    
    
    5.69
    %
    
    
    1,077Years thereafter
    
    
    3.25
    %
    
    
    565,855
    
    
    
    5.79
    %
    
    
    1,918,026Total
    
    
    
    
    
    $
    565,855
    
    
    
    
    
    
    $
    2,008,619Fair value
    
    
    
    
    
    $
    565,855
    
    
    
    
    
    
    $
    2,025,001
 Variable-Rate
    
    
    Fixed-RateLong-Term Debt
    
    
    Long-Term DebtInterest
    
    
    
    
    
    
    Interest2004
    
    Rates
    
    
    Amount
    
    
    Rates
    
    
    Amount2005
    
    
    
    
    
    $
    
    
    
    
    7.27
    %
    
    $
    401,7272006
    
    
    
    
    
    
    
    
    
    
    6.72
    %
    
    
    86,0822007
    
    
    
    
    
    
    
    
    
    
    5.51
    %
    
    
    8672008
    
    
    
    
    
    
    
    
    
    
    5.51
    %
    
    
    1,0542009
    
    
    
    
    
    
    
    
    
    
    5.51
    %
    
    
    818Years thereafter
    
    
    1.89
    %
    
    
    565,860
    
    
    
    4.79
    %
    
    
    1,669,901Total
    
    
    
    
    
    $
    565,860
    
    
    
    
    
    
    $
    2,160,449Fair value
    
    
    
    
    
    $
    565,799
    
    
    
    
    
    
    $
    2,254,061
 Commodity Price Risk
  56




---



##### Table of Contents




    
    Regulated Electricity  non-trading derivative instruments that hedge our purchases
and sales of electricity and fuel for APS Native Load requirements of our regulated
electricity business segment; and
 
    
    Marketing and Trading  non-trading and trading derivative instruments of our
competitive business segment.
  2005
    
    
    2004Regulated
    
    
    Marketing and
    
    
    Regulated
    
    
    Marketing andElectricity
    
    
    Trading
    
    
    Electricity
    
    
    TradingMark-to-market of net positions
at beginning of period
    
    $
    33
    
    
    $
    107
    
    
    $
    
    
    
    $
    69Recognized in earnings:Change in mark-to-market
gains for future period
deliveries
    
    
    14
    
    
    
    20
    
    
    
    9
    
    
    
    20Mark-to-market
(gains) losses realized
including ineffectiveness
during the period
    
    
    (8
    )
    
    
    (14
    )
    
    
    3
    
    
    
    (15
    )Deferred as a regulatory liability
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    Recognized in OCI:Change in mark-to-market
gains for future period
deliveries (a)
    
    
    359
    
    
    
    102
    
    
    
    42
    
    
    
    37Mark-to-market
gains realized
during the period
    
    
    (94
    )
    
    
    (34
    )
    
    
    (21
    )
    
    
    (6
    )Change in valuation techniques
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Mark-to-market of net positions
at end of period
    
    $
    335
    
    
    $
    181
    
    
    $
    33
    
    
    $
    107
 
 (a)
    
    The increase in regulated mark-to-market recorded in OCI is due primarily to
increases in forward natural gas prices. 57




---



##### Table of Contents



Regulated Electricity
 TotalYears
    
    
    fairSource of Fair Value
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    thereafter
    
    
    valuePrices actively quoted
    
    $
    162
    
    
    $
    58
    
    
    $
    39
    
    
    $
    7
    
    
    $
    
    
    
    $
    
    
    
    $
    266Prices provided by
other external sources
    
    
    21
    
    
    
    61
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83Prices based on models
and other valuation
methods
    
    
    (3
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    (5
    )
    
    
    (14
    )Total by maturity
    
    $
    180
    
    
    $
    117
    
    
    $
    39
    
    
    $
    5
    
    
    $
    (1
    )
    
    $
    (5
    )
    
    $
    335
 Marketing and Trading
 TotalYears
    
    
    fairSource of Fair Value
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    thereafter
    
    
    valuePrices actively quoted
    
    $
    22
    
    
    $
    
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    (1
    )
    
    $
    
    
    
    $
    20Prices provided by
other external sources
    
    
    76
    
    
    
    87
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183Prices based on models
and other valuation
methods
    
    
    (26
    )
    
    
    (12
    )
    
    
    16
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    2
    
    
    
    (22
    )Total by maturity
    
    $
    72
    
    
    $
    75
    
    
    $
    36
    
    
    $
    (2
    )
    
    $
    (2
    )
    
    $
    2
    
    
    $
    181
 58




---



##### Table of Contents



December 31, 2005
    
    
    December 31, 2004Gain (Loss)
    
    
    Gain (Loss)Price Up 10%
    
    
    Price Down 10%
    
    
    Price Up 10%
    
    
    Price Down 10%Mark-to-market changes
reported in
earnings (a):Electricity
    
    $
    
    
    
    $
    
    
    
    $
    (4
    )
    
    $
    4Natural gas
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (2
    )Other
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )Mark-to-market changes
reported in OCI (b):Electricity
    
    
    66
    
    
    
    (66
    )
    
    
    35
    
    
    
    (35
    )Natural gas
    
    
    103
    
    
    
    (103
    )
    
    
    43
    
    
    
    (43
    )Total
    
    $
    169
    
    
    $
    (169
    )
    
    $
    77
    
    
    $
    (77
    )
 
 (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
  ARIZONA PUBLIC SERVICE COMPANY  RESULTS OF OPERATIONS
 General
  59




---



##### Table of Contents



Deferred Fuel and Purchased Power Costs
    2005 Compared with 2004
   60




---



##### Table of Contents



Increase (Decrease)Pretax
    
    
    After TaxGross margin:Deferred fuel and purchased power costs
    
    $
    171
    
    
    $
    104Retail price increase effective April 1, 2005
    
    
    65
    
    
    
    40Higher retail sales volumes due to customer growth,
excluding weather effects
    
    
    58
    
    
    
    35Effects of weather on retail sales
    
    
    14
    
    
    
    9Higher fuel and purchased power costs primarily due to
higher prices and more plant outage days
    
    
    (146
    )
    
    
    (89
    )Miscellaneous items, net
    
    
    (14
    )
    
    
    (9
    )Net increase in gross margin
    
    
    148
    
    
    
    90Regulatory disallowance, in accordance with the retail rate settlement
    
    
    (139
    )
    
    
    (84
    )Operations and maintenance increases primarily due to:Customer service costs, including regulatory demand-side
management programs and planned maintenance
    
    
    (22
    )
    
    
    (13
    )Generation costs, including planned maintenance and overhauls
    
    
    (16
    )
    
    
    (10
    )Costs of PWEC Dedicated Assets not included in prior year
    
    
    (14
    )
    
    
    (9
    )Depreciation and amortization decreases primarily due to:Lower regulatory asset amortization
    
    
    22
    
    
    
    13Higher depreciable assets due to transfer of PWECDedicated Assets, partially offset by lower depreciation rates
    
    
    (11
    )
    
    
    (7
    )Higher property taxes due to increased plant in service
    
    
    (12
    )
    
    
    (7
    )Miscellaneous items, net
    
    
    (7
    )
    
    
    (3
    )Net decrease in net income
    
    $
    (51
    )
    
    $
    (30
    )
 Regulated Electricity Revenues
  
    
    an $81 million increase in retail revenues related to customer growth,
excluding weather effects;
    
    a $65 million increase in retail revenues due to a price increase
effective April 1, 2005;
    
    a $40 million increase in Off-System Sales primarily resulting from
sales previously reported in marketing and trading that were classified beginning in
April 2005 as sales in regulated electricity in accordance with the APS retail rate
case settlement;
    
    an $11 million increase in retail revenues related to weather; and
    
    a $4 million decrease due to miscellaneous factors.
 61




---



##### Table of Contents



Marketing and Trading Revenues
  
    
    a $69 million decrease in energy trading revenues on realized sales of
electricity primarily due to lower delivered electricity prices and lower volumes;
    
    a $40 million decrease in Off-System Sales due to the absence of sales
previously reported in marketing and trading that were classified beginning in April
2005 as sales in regulated electricity in accordance with the APS retail rate case
settlement; and
    
    an $11 million decrease on future mark-to-market gains due to higher
prices.
 2004 Compared with 2003
   62




---



##### Table of Contents



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
  
    
    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
  
    
    a $13 million decrease from Off-System Sales due to substantially lower
sales volumes, resulting from lower market spark spreads;
 63




---



##### Table of Contents




    
    $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.
 LIQUIDITY AND CAPITAL RESOURCES  ARIZONA PUBLIC SERVICE COMPANY
 Contractual Obligations
  2007-
    
    
    2009-
    
    
    There-2006
    
    
    2008
    
    
    2010
    
    
    after
    
    
    TotalLong-term debt payments,
including interest (a)
    
    $
    219
    
    
    $
    259
    
    
    $
    480
    
    
    $
    3,350
    
    
    $
    4,308Capital lease payments
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    8Operating lease payments
    
    
    66
    
    
    
    129
    
    
    
    122
    
    
    
    288
    
    
    
    605Purchase power and fuel
commitments (b)
    
    
    265
    
    
    
    331
    
    
    
    256
    
    
    
    896
    
    
    
    1,748Minimum pension funding
requirement (c)
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Purchase obligations (d)
    
    
    25
    
    
    
    9
    
    
    
    
    
    
    
    75
    
    
    
    109Nuclear decommissioning
funding requirements
    
    
    21
    
    
    
    42
    
    
    
    46
    
    
    
    259
    
    
    
    368Total contractual
commitments
    
    $
    634
    
    
    $
    772
    
    
    $
    906
    
    
    $
    4,870
    
    
    $
    7,182
 
 (a)
    
    The long-term debt matures at various dates through 2035 and bears interest principally at
fixed rates. Interest on variable-rate long-term debt is determined by the rates at December
31, 2005.(b)
    
    APS purchase power and fuel commitments include purchases of coal, electricity, natural gas,
and nuclear fuel (see Note 11).(c)
    
    Future pension contributions are not determinable for time periods after 2006.(d)
    
    These contractual obligations include commitments for capital expenditures and other
obligations. 64




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
  65




---



##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 PageManagements Report on Internal Control Over Financial Reporting (Pinnacle West
Capital Corporation)
    
    
    67Report of Independent Registered Public Accounting Firm
    
    
    68Pinnacle West Consolidated Statements of Income for 2005, 2004 and 2003
    
    
    70Pinnacle West Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    71Pinnacle West Consolidated Statements of Cash Flows for 2005, 2004 and 2003
    
    
    73Pinnacle West Consolidated Statements of Changes in Common Stock Equity
for 2005, 2004 and 2003
    
    
    74Notes to Pinnacle Wests Consolidated Financial Statements
    
    
    75Managements Report on Internal Control Over Financial Reporting (Arizona
Public Service Company)
    
    
    126Report of Independent Registered Public Accounting Firm
    
    
    127APS Statements of Income for 2005, 2004 and 2003
    
    
    129APS Balance Sheets as of December 31, 2005 and 2004
    
    
    130APS Statements of Cash Flows for 2005, 2004 and 2003
    
    
    132APS Statements of Changes in Common Stock Equity for 2005, 2004 and 2003
    
    
    133Supplemental Notes to APS Financial Statements
    
    
    135Financial Statement Schedule for 2005, 2004 and 2003Pinnacle West Schedule II  Valuation and Qualifying Accounts for 2005, 2004
and 2003
    
    
    143APS Schedule II Reserve for Uncollectibles for 2005, 2004 and 2003
    
    
    144
  66




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MANAGEMENTS REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(PINNACLE WEST CAPITAL CORPORATION)
 Internal Control  Integrated Framework Internal Control  Integrated Framework,
  67




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    68




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69




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PINNACLE WEST CAPITAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
  Year Ended December 31,2005
    
    
    2004
    
    
    2003OPERATING REVENUESRegulated electricity segment
    
    $
    2,237,145
    
    
    $
    2,035,247
    
    
    $
    1,978,075Marketing and trading segment
    
    
    351,558
    
    
    
    400,628
    
    
    
    391,196Real estate segment
    
    
    338,031
    
    
    
    350,315
    
    
    
    361,604Other revenues
    
    
    61,221
    
    
    
    42,816
    
    
    
    27,929Total
    
    
    2,987,955
    
    
    
    2,829,006
    
    
    
    2,758,804OPERATING EXPENSESRegulated electricity segment fuel and
purchased power
    
    
    595,141
    
    
    
    567,433
    
    
    
    517,320Marketing and trading segment fuel and
purchased power
    
    
    293,091
    
    
    
    320,667
    
    
    
    344,862Operations and maintenance
    
    
    635,827
    
    
    
    592,320
    
    
    
    548,732Real estate segment operations
    
    
    278,366
    
    
    
    284,194
    
    
    
    305,974Depreciation and amortization
    
    
    347,652
    
    
    
    391,597
    
    
    
    435,140Taxes other than income taxes
    
    
    132,040
    
    
    
    120,722
    
    
    
    110,270Other expenses
    
    
    51,987
    
    
    
    34,108
    
    
    
    23,254Regulatory disallowance (Note 3)
    
    
    138,562
    
    
    
    
    
    
    
    Total
    
    
    2,472,666
    
    
    
    2,311,041
    
    
    
    2,285,552OPERATING INCOME
    
    
    515,289
    
    
    
    517,965
    
    
    
    473,252OTHERAllowance for equity funds used during
construction
    
    
    11,191
    
    
    
    4,885
    
    
    
    14,240Other income (Note 19)
    
    
    23,360
    
    
    
    53,289
    
    
    
    35,563Other expense (Note 19)
    
    
    (26,716
    )
    
    
    (21,340
    )
    
    
    (20,574
    )Total
    
    
    7,835
    
    
    
    36,834
    
    
    
    29,229INTEREST EXPENSEInterest charges
    
    
    185,087
    
    
    
    183,527
    
    
    
    193,973Capitalized interest
    
    
    (12,018
    )
    
    
    (11,460
    )
    
    
    (19,078
    )Total
    
    
    173,069
    
    
    
    172,067
    
    
    
    174,895INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
    
    
    350,055
    
    
    
    382,732
    
    
    
    327,586INCOME TAXES
    
    
    126,892
    
    
    
    136,142
    
    
    
    102,202INCOME FROM CONTINUING OPERATIONS
    
    
    223,163
    
    
    
    246,590
    
    
    
    225,384INCOME (LOSS) FROM DISCONTINUED OPERATIONSNet of income tax expense (benefit)
of ($29,797), ($1,805) and $9,887
    
    
    (46,896
    )
    
    
    (3,395
    )
    
    
    15,195NET INCOME
    
    $
    176,267
    
    
    $
    243,195
    
    
    $
    240,579WEIGHTED-AVERAGE COMMON SHARESOUTSTANDING  BASIC
    
    
    96,484
    
    
    
    91,397
    
    
    
    91,265WEIGHTED-AVERAGE COMMON SHARESOUTSTANDING DILUTED
    
    
    96,590
    
    
    
    91,532
    
    
    
    91,405EARNINGS PER WEIGHTED  AVERAGE
COMMON SHARE OUTSTANDINGIncome from continuing operations  basic
    
    $
    2.31
    
    
    $
    2.70
    
    
    $
    2.47Net income  basic
    
    
    1.83
    
    
    
    2.66
    
    
    
    2.64Income from continuing operations  diluted
    
    
    2.31
    
    
    
    2.69
    
    
    
    2.47Net income  diluted
    
    
    1.82
    
    
    
    2.66
    
    
    
    2.63DIVIDENDS DECLARED PER SHARE
    
    $
    1.925
    
    
    $
    1.825
    
    
    $
    1.725
  70




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PINNACLE WEST CAPITAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
  December 31,2005
    
    
    2004ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    154,003
    
    
    $
    163,366Investment in debt securities
    
    
    
    
    
    
    181,175Customer and other receivables
    
    
    502,681
    
    
    
    461,090Allowance for doubtful accounts
    
    
    (4,979
    )
    
    
    (4,896
    )Materials and supplies (at average cost)
    
    
    109,736
    
    
    
    101,333Fossil fuel (at average cost)
    
    
    23,658
    
    
    
    20,512Assets from risk management and trading
activities (Note 18)
    
    
    827,779
    
    
    
    166,896Assets held for sale (Note 22)
    
    
    202,645
    
    
    
    Other current assets
    
    
    75,869
    
    
    
    47,654Total current assets
    
    
    1,891,392
    
    
    
    1,137,130INVESTMENTS AND OTHER ASSETSReal estate investments  net (Notes 1 and 6)
    
    
    390,702
    
    
    
    382,398Assets from long-term risk management and trading
activities (Note 18)
    
    
    597,831
    
    
    
    224,341Decommissioning trust accounts (Note 12)
    
    
    293,943
    
    
    
    267,700Other assets
    
    
    111,931
    
    
    
    107,212Total investments and other assets
    
    
    1,394,407
    
    
    
    981,651PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6,
9 and 10)Plant in service and held for future use
    
    
    10,727,695
    
    
    
    10,486,648Less accumulated depreciation and amortization
    
    
    3,622,884
    
    
    
    3,365,954Total
    
    
    7,104,811
    
    
    
    7,120,694Construction work in progress
    
    
    327,172
    
    
    
    258,119Intangible assets, net of accumulated amortization
of $182,576 and $158,584
    
    
    90,916
    
    
    
    105,486Nuclear fuel, net of accumulated amortization of
$53,984 and $59,020
    
    
    54,184
    
    
    
    51,188Net property, plant and equipment
    
    
    7,577,083
    
    
    
    7,535,487DEFERRED DEBITSDeferred fuel and purchased power regulatory asset
(Notes 1, 3 and 4)
    
    
    172,756
    
    
    
    Other regulatory assets (Notes 1, 3 and 4)
    
    
    151,123
    
    
    
    135,051Other deferred debits
    
    
    135,884
    
    
    
    107,428Total deferred debits
    
    
    459,763
    
    
    
    242,479TOTAL ASSETS
    
    $
    11,322,645
    
    
    $
    9,896,747
  71




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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
 December 31,2005
    
    
    2004LIABILITIES AND COMMON STOCK EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    377,107
    
    
    $
    373,526Accrued taxes
    
    
    289,235
    
    
    
    245,611Accrued interest
    
    
    31,774
    
    
    
    38,795Short-term borrowings (Note 5)
    
    
    15,673
    
    
    
    71,030Current maturities of long-term debt (Note 6)
    
    
    384,947
    
    
    
    617,165Customer deposits
    
    
    60,509
    
    
    
    55,558Deferred income taxes (Note 4)
    
    
    94,710
    
    
    
    9,057Liabilities from risk management and trading
activities (Note 18)
    
    
    720,693
    
    
    
    113,406Other current liabilities
    
    
    297,425
    
    
    
    101,748Total current liabilities
    
    
    2,272,073
    
    
    
    1,625,896LONG-TERM DEBT LESS CURRENT MATURITIES
(Note 6)
    
    
    2,608,455
    
    
    
    2,584,985DEFERRED CREDITS AND OTHERDeferred income taxes (Note 4)
    
    
    1,225,253
    
    
    
    1,227,553Regulatory liabilities (Notes 1, 3 and 4)
    
    
    592,494
    
    
    
    506,646Liability for asset retirements (Note 12)
    
    
    269,011
    
    
    
    251,612Pension liability (Note 8)
    
    
    264,476
    
    
    
    234,445Liabilities from risk management and trading
activities (Note 18)
    
    
    256,413
    
    
    
    156,262Unamortized gain  sale of utility plant (Note 9)
    
    
    45,757
    
    
    
    50,333Other
    
    
    363,749
    
    
    
    308,819Total deferred credits and other
    
    
    3,017,153
    
    
    
    2,735,670COMMITMENTS AND CONTINGENCIES (Notes 3, 11,
12 and 21)COMMON STOCK EQUITY (Note 7)Common stock, no par value; authorized
150,000,000 shares; issued 99,077,133 at end of
2005 and 91,802,861 at end of 2004
    
    
    2,067,377
    
    
    
    1,769,047Treasury stock at cost; 20,058 shares at end of 2005
and 9,522 shares at end of 2004
    
    
    (1,245
    )
    
    
    (428
    )Total common stock
    
    
    2,066,132
    
    
    
    1,768,619Accumulated other comprehensive income (loss):Minimum pension liability adjustment
    
    
    (97,277
    )
    
    
    (81,788
    )Derivative instruments
    
    
    262,397
    
    
    
    59,243Total accumulated other comprehensive income
(loss)
    
    
    165,120
    
    
    
    (22,545
    )Retained earnings
    
    
    1,193,712
    
    
    
    1,204,122Total common stock equity
    
    
    3,424,964
    
    
    
    2,950,196TOTAL LIABILITIES AND COMMON STOCK EQUITY
    
    $
    11,322,645
    
    
    $
    9,896,747
  72




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PINNACLE WEST CAPITAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended December 31,2005
    
    
    2004 (a)
    
    
    2003 (a)CASH FLOWS FROM OPERATING ACTIVITIESNet Income
    
    $
    176,267
    
    
    $
    243,195
    
    
    $
    240,579Adjustments to reconcile net income to net cash provided by
operating activities:Silverhawk impairment loss
    
    
    91,025
    
    
    
    
    
    
    
    Regulatory disallowance
    
    
    138,562
    
    
    
    
    
    
    
    Equity earnings in Phoenix Suns partnership
    
    
    
    
    
    
    (34,594
    )
    
    
    Depreciation and amortization including nuclear fuel
    
    
    381,604
    
    
    
    432,161
    
    
    
    466,900Deferred fuel and purchased power
    
    
    (172,756
    )
    
    
    
    
    
    
    Allowance for equity funds used during construction
    
    
    (11,191
    )
    
    
    (4,885
    )
    
    
    (14,240
    )Deferred income taxes
    
    
    (23,806
    )
    
    
    (113,850
    )
    
    
    85,462Change in mark-to-market valuations
    
    
    (11,670
    )
    
    
    (18,915
    )
    
    
    17,410Changes in current assets and liabilities:Customer and other receivables
    
    
    (38,763
    )
    
    
    (11,056
    )
    
    
    2,346Materials, supplies and fossil fuel
    
    
    (16,836
    )
    
    
    2,621
    
    
    
    (4,629
    )Other current assets
    
    
    (28,215
    )
    
    
    25,380
    
    
    
    (6,646
    )Accounts payable
    
    
    (6,392
    )
    
    
    85,344
    
    
    
    (34,303
    )Accrued taxes
    
    
    43,624
    
    
    
    175,842
    
    
    
    (1,338
    )Other current liabilities
    
    
    1,567
    
    
    
    10,561
    
    
    
    3,725Proceeds from the sale of real estate assets
    
    
    16,218
    
    
    
    80,035
    
    
    
    130,597Real estate investments
    
    
    (88,055
    )
    
    
    (62,812
    )
    
    
    (51,837
    )Change in risk management and trading  assets
    
    
    (62,100
    )
    
    
    (2,549
    )
    
    
    46,911Change in risk management and trading  liabilities
    
    
    110,393
    
    
    
    13,018
    
    
    
    (11,613
    )Collateral
    
    
    192,040
    
    
    
    12,619
    
    
    
    (10,453
    )Change in other long-term assets
    
    
    (35,793
    )
    
    
    (36,666
    )
    
    
    (6,099
    )Change in other long-term liabilities
    
    
    74,573
    
    
    
    55,443
    
    
    
    49,251Net cash flow provided by operating activities
    
    
    730,296
    
    
    
    850,892
    
    
    
    902,023CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (633,532
    )
    
    
    (538,842
    )
    
    
    (713,256
    )Purchase of Sundance Plant
    
    
    (185,046
    )
    
    
    
    
    
    
    Proceeds from sale of Silverhawk
    
    
    
    
    
    
    90,967
    
    
    
    Capitalized interest
    
    
    (12,018
    )
    
    
    (16,311
    )
    
    
    (29,444
    )Proceeds from the sale of the Phoenix Suns partnership
    
    
    
    
    
    
    23,101
    
    
    
    Purchases of investment securities
    
    
    (2,962,278
    )
    
    
    (1,040,955
    )
    
    
    (877,660
    )Proceeds from sale of investment securities
    
    
    3,143,481
    
    
    
    951,630
    
    
    
    785,810Proceeds from nuclear decommissioning trust sales
    
    
    186,215
    
    
    
    123,795
    
    
    
    168,874Investment in nuclear decommissioning trust
    
    
    (204,633
    )
    
    
    (135,239
    )
    
    
    (180,319
    )Proceeds from real estate investments
    
    
    82,719
    
    
    
    
    
    
    
    46,781Other
    
    
    
    
    
    
    (3,072
    )
    
    
    (9,595
    )Net cash flow used for investing activities
    
    
    (585,092
    )
    
    
    (544,926
    )
    
    
    (808,809
    )CASH FLOWS FROM FINANCING ACTIVITIESIssuance of long-term debt
    
    
    1,088,815
    
    
    
    478,328
    
    
    
    656,850Short-term borrowings and payments  net
    
    
    (46,413
    )
    
    
    (15,051
    )
    
    
    (173,303
    )Dividends paid on common stock
    
    
    (186,677
    )
    
    
    (166,772
    )
    
    
    (157,417
    )Repayment of long-term debt
    
    
    (1,288,034
    )
    
    
    (604,015
    )
    
    
    (368,162
    )Common stock equity issuance
    
    
    298,168
    
    
    
    18,291
    
    
    
    Other
    
    
    (20,426
    )
    
    
    9,690
    
    
    
    8,181Net cash flow used for financing activities
    
    
    (154,567
    )
    
    
    (279,529
    )
    
    
    (33,851
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (9,363
    )
    
    
    26,437
    
    
    
    59,363CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
    
    
    163,366
    
    
    
    136,929
    
    
    
    77,566CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    154,003
    
    
    $
    163,366
    
    
    $
    136,929Supplemental disclosure of cash flow informationCash paid during the period for:Income taxes paid, net of refunds
    
    $
    86,711
    
    
    $
    66,447
    
    
    $
    32,816Interest paid, net of amounts capitalized
    
    $
    181,975
    
    
    $
    191,865
    
    
    $
    161,581
  
 (a)
    
    See Cash and Cash Equivalents in Note 1 for information regarding revisions and certain
reclassifications of prior year amounts. 73




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PINNACLE WEST CAPITAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
  Year Ended December 31,2005
    
    
    2004
    
    
    2003COMMON STOCK (Note 7)Balance at beginning of year
    
    $
    1,769,047
    
    
    $
    1,744,354
    
    
    $
    1,737,258Issuance of common stock
    
    
    298,330
    
    
    
    18,291
    
    
    
    Other
    
    
    
    
    
    
    6,402
    
    
    
    7,096Balance at end of year
    
    
    2,067,377
    
    
    
    1,769,047
    
    
    
    1,744,354TREASURY STOCK (Note 7)Balance at beginning of year
    
    
    (428
    )
    
    
    (3,273
    )
    
    
    (4,358
    )Purchase of treasury stock
    
    
    (1,601
    )
    
    
    (2,986
    )
    
    
    Reissuance of treasury stock used for stock
compensation, net
    
    
    784
    
    
    
    5,831
    
    
    
    1,085Balance at end of year
    
    
    (1,245
    )
    
    
    (428
    )
    
    
    (3,273
    )RETAINED EARNINGSBalance at beginning of year
    
    
    1,204,122
    
    
    
    1,127,699
    
    
    
    1,044,537Net income
    
    
    176,267
    
    
    
    243,195
    
    
    
    240,579Common stock dividends
    
    
    (186,677
    )
    
    
    (166,772
    )
    
    
    (157,417
    )Balance at end of year
    
    
    1,193,712
    
    
    
    1,204,122
    
    
    
    1,127,699ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)Balance at beginning of year
    
    
    (22,545
    )
    
    
    (39,001
    )
    
    
    (91,284
    )Minimum pension liability adjustment, net
of tax expense (benefit) of ($9,526),
($9,756) and $3,700
    
    
    (15,489
    )
    
    
    (15,224
    )
    
    
    4,700Unrealized gain on derivative instruments,
net of tax expense of $179,927,
$31,117 and $33,298
    
    
    281,019
    
    
    
    48,226
    
    
    
    51,089Reclassification of realized gain to
income, net of tax benefit of
($50,056), ($10,695) and ($2,343)
    
    
    (77,865
    )
    
    
    (16,546
    )
    
    
    (3,506
    )Balance at end of year
    
    
    165,120
    
    
    
    (22,545
    )
    
    
    (39,001
    )TOTAL COMMON STOCK EQUITY
    
    $
    3,424,964
    
    
    $
    2,950,196
    
    
    $
    2,829,779COMPREHENSIVE INCOMENet income
    
    $
    176,267
    
    
    $
    243,195
    
    
    $
    240,579Other comprehensive income
    
    
    187,665
    
    
    
    16,456
    
    
    
    52,283Comprehensive income
    
    $
    363,932
    
    
    $
    259,651
    
    
    $
    292,862
 
 74




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PINNACLE WEST CAPITAL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Significant Accounting Policies
 Consolidation and Nature of Operations
   Accounting Records and Use of Estimates
  Derivative Accounting
   75




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         76




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Regulatory Accounting
      December 31,2005
    
    
    2004Deferred fuel and purchased power (Note 3)
    
    $
    173
    
    
    $
    Competition rules compliance charge
    
    
    42
    
    
    
    50Deferred compensation
    
    
    25
    
    
    
    24Regulatory asset for deferred income taxes
    
    
    19
    
    
    
    12Loss on reacquired debt (a)
    
    
    18
    
    
    
    17Capital contributions on the Mead-Phoenix
transmission line
    
    
    14
    
    
    
    13Coal reclamation
    
    
    13
    
    
    
    Bark beetle remediation
    
    
    6
    
    
    
    Spent nuclear fuel storage (Note 11)
    
    
    6
    
    
    
    11Other
    
    
    8
    
    
    
    8Total regulatory assets
    
    $
    324
    
    
    $
    135
 77




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   December 31,2005
    
    
    2004Removal costs (a)
    
    $
    385
    
    
    $
    376Regulatory liability related to asset retirement
obligations
    
    
    101
    
    
    
    86Deferred fuel and purchased power 
mark-to-market
    
    
    31
    
    
    
    Regulatory liability for deferred income taxes
    
    
    24
    
    
    
    Deferred interest income
    
    
    22
    
    
    
    22Deferred gains on utility property
    
    
    20
    
    
    
    20Demand-side management
    
    
    7
    
    
    
    Other
    
    
    2
    
    
    
    3Total regulatory liabilities
    
    $
    592
    
    
    $
    507
 
 (a)
    
    In accordance with SFAS No. 71, APS accrues for removal costs for its regulated assets,
even if there is no legal obligation for removal. Utility Plant and Depreciation
  
    
    material and labor;
    
    contractor costs;
    
    capitalized leases;
    
    construction overhead costs (where applicable); and
    
    capitalized interest or an allowance for funds used during construction.
   78




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
    
    Fossil plant  19 years;
    
    Nuclear plant  20 years;
    
    Other generation  28 years;
    
    Transmission  40 years;
    
    Distribution  32 years; and
    
    Other  6 years.
  Investments
   Capitalized Interest
  Allowance for Funds Used During Construction
   Electric Revenues
  79




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Real Estate Revenues
  Real Estate Investments
  80




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Cash and Cash Equivalents
     Year Ended December 31,2004
    
    

2003Net cash flows from operating activities as previously reported
    
    $
    842
    
    
    $
    901Change in net cash flows from discontinued operations
    
    
    9
    
    
    
    1Net cash flows from operating activities as currently reported
    
    $
    851
    
    
    $
    902Net cash flows used for investing activities as previously
reported
    
    $
    (532
    )
    
    $
    (815
    )Change in net cash flows used for discontinued operations
    
    
    (13
    )
    
    
    6Net cash flows used for investing activities as currently
reported
    
    $
    (545
    )
    
    $
    (809
    )Net cash flows used for financing activities as previously
reported
    
    $
    (278
    )
    
    $
    (32
    )Change in net cash flows used for discontinued operations
    
    
    (2
    )
    
    
    (2
    )Net cash flows used for financing activities as currently
reported
    
    $
    (280
    )
    
    $
    (34
    )
 Nuclear Fuel
  81




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Income Taxes
  Reacquired Debt Costs
  Stock-Based Compensation
   82




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2005
    
    
    2004
    
    
    2003Net Income as reported:
    
    $
    176,267
    
    
    $
    243,195
    
    
    $
    240,579Add: Stock compensation
expense included in reported
net income (net of tax)
    
    
    3,738
    
    
    
    4,690
    
    
    
    3,514Deduct: Total stock
compensation expense
determined under fair value
method (net of tax)
    
    
    (3,738
    )
    
    
    (5,311
    )
    
    
    (5,220
    )Pro forma net income
    
    $
    176,267
    
    
    $
    242,574
    
    
    $
    238,873Earnings per share  basic:As reported
    
    $
    1.83
    
    
    $
    2.66
    
    
    $
    2.64Pro forma (fair value
method)
    
    $
    1.83
    
    
    $
    2.65
    
    
    $
    2.62Earnings per share  diluted:As reported
    
    $
    1.82
    
    
    $
    2.66
    
    
    $
    2.63Pro forma (fair value
method)
    
    $
    1.82
    
    
    $
    2.65
    
    
    $
    2.61
  2004
    
    2003Risk-free interest rate
    
    
    3.15
    %
    
    
    3.35
    %Dividend yield
    
    
    4.76
    %
    
    
    5.26
    %Volatility
    
    
    17.04
    %
    
    
    38.03
    %Expected life (months)
    
    
    60
    
    
    
    60
  Intangible Assets
  83




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2. New Accounting Standards
   3. Regulatory Matters
 APS General Rate Case
   Updated Filing
    
    
    Original Filing(January 31, 2006)
    
    
    (November 4, 2005)Annual
    
    
    
    
    
    
    AnnualRevenue
    
    
    Percentage
    
    
    Revenue
    
    
    PercentageIncrease
    
    
    Increase
    
    
    Increase
    
    
    IncreaseIncreased fuel and purchased power
    
    $
    299.0
    
    
    
    14.0
    %
    
    $
    246.8
    
    
    
    12.0
    %Capital structure update
    
    
    98.3
    
    
    
    4.6
    %
    
    
    96.8
    
    
    
    4.7
    %Rate base update, including acquisition of
Sundance Plant
    
    
    46.2
    
    
    
    2.2
    %
    
    
    42.5
    
    
    
    2.1
    %Pension funding
    
    
    41.3
    
    
    
    1.9
    %
    
    
    41.2
    
    
    
    2.0
    %Other items
    
    
    (30.9
    )
    
    
    (1.4
    )%
    
    
    (18.2
    )
    
    
    (0.9
    )%Total increase
    
    $
    453.9
    
    
    
    21.3
    %
    
    $
    409.1
    
    
    
    19.9
    %
  84




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Application for Emergency Interim Rate Increase
  85




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Power Supply Adjustor
 PSA Provisions
  
    
    APS will record deferrals for recovery or refund to the extent actual retail fuel
and purchased power costs vary from the base fuel amount (currently $0.020743 per kWh);
    
    the deferrals are subject to a 90/10 sharing arrangement in which APS must absorb
10% of the retail fuel and purchased power costs above the base fuel amount and may
retain 10% of the benefit from the retail fuel and purchased power costs that are below
the base fuel amount;
    
    amounts to be recovered or refunded through the annual PSA adjustment are limited to
a cumulative plus or minus $0.004 per kWh over the life of the PSA;
    
    the recoverable amount of annual retail fuel and purchased power costs through
current base rates and the PSA was originally capped at $776.2 million; however, the
ACC has removed the cap pending the ACCs final ruling on APS pending request to have
the cap eliminated or substantially raised;
    
    the PSA will remain in effect for a minimum five-year period, but the ACC may
eliminate the PSA at any time, if appropriate, in the event APS files a rate case
before the expiration of the five-year period (which APS did by filing the general rate
case noted above) or if APS does not comply with the terms of the PSA; and
    
    APS is prohibited from requesting PSA surcharges until after the PSA annual adjustor
rate has been set each year. The amount available for potential PSA surcharges will be
limited to the amount of accumulated deferrals through the prior year-end which are not
expected to be recovered through the annual adjustor or any PSA surcharges previously
approved by the ACC.
 2006 PSA Annual Adjustor
 Application for PSA Surcharges
 86




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Proposed Modifications to PSA (Requested In General Rate Case)
  
    
    The $0.004 per kWh maximum adjustor rate over the life of the PSA would be
eliminated, while the $0.004 per kWh maximum annual change in the adjustor rate would
remain in effect;
    
    The $776.2 million annual limit on the retail fuel and purchased power costs under
APS current base rates and the PSA would be removed or increased (although APS may
defer fuel and purchased power costs above $776.2 million per year pending the ACCs
final ruling on APS pending request to have the cap eliminated or substantially
raised);
    
    The current provision that APS is required to file a surcharge application with the
ACC after accumulated pretax PSA deferrals equal $50 million and before they equal $100
million would be eliminated, thereby giving APS flexibility in determining when a
surcharge filing should be made;
    
    The costs of renewable energy and capacity costs attributable to purchased power
obtained through competitive procurement would be excluded from the existing 90/10
sharing arrangement under which APS absorbs 10% of the retail fuel and purchased power
costs above the base fuel amount and retains 10% of the benefit from retail fuel and
purchased power costs that are below the base fuel amount; and
    
    10% of any realized gains or losses resulting from APS hedges of Retail Fuel and
Power Costs would be retained or absorbed by APS before being subject to the 90/10
sharing provision under the PSA.
 APS 2003 Rate Case
  
    
    APS received an annual retail rate increase of approximately 4.2%, which was
effective as of April 1, 2005. This increase does not include the impact of the PSA.
    
    APS was authorized to acquire the PWEC Dedicated Assets from Pinnacle West Energy,
with a net carrying value of approximately $850 million, and to rate base the
 87




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
    
    Effective April 1, 2005, APS adopted longer service lives for certain depreciable
assets. This change is expected to have the effect of reducing annual depreciation
expense for financial reporting purposes by approximately $30 million. APS also
adopted longer service lives for the PWEC Dedicated Assets, which is expected to have
the effect of reducing annual depreciation expense for financial reporting purposes by
approximately $10 million.
 Equity Infusions
  Federal
  4. Income Taxes
    88




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Year Ended December 31,2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    107,837
    
    
    $
    200,133
    
    
    $
    22,875State
    
    
    13,064
    
    
    
    48,054
    
    
    
    3,752Total current
    
    
    120,901
    
    
    
    248,187
    
    
    
    26,627Deferred:Income from continuing operations
    
    
    11,930
    
    
    
    (113,850
    )
    
    
    81,756Discontinued operations
    
    
    (35,736
    )
    
    
    
    
    
    
    3,706Total deferred
    
    
    (23,806
    )
    
    
    (113,850
    )
    
    
    85,462Total income tax expense
    
    
    97,095
    
    
    
    134,337
    
    
    
    112,089Less: income tax expense (benefit) on
discontinued operations
    
    
    (29,797
    )
    
    
    (1,805
    )
    
    
    9,887Income tax expense  continuing operations
    
    $
    126,892
    
    
    $
    136,142
    
    
    $
    102,202
 89




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Federal income tax expense at 35%
statutory rate
    
    $
    122,519
    
    
    $
    133,956
    
    
    $
    114,655Increases (reductions) in tax expense
resulting from:State income tax net of federal income
tax benefit
    
    
    11,981
    
    
    
    14,460
    
    
    
    11,493Credits and favorable adjustments
related to prior years resolved in
current year
    
    
    
    
    
    
    (6,138
    )
    
    
    (17,944
    )Medicare Subsidy Part-D (see Note 8)
    
    
    (2,733
    )
    
    
    (1,778
    )
    
    
    Allowance for equity funds used during
construction (see Note 1)
    
    
    (3,694
    )
    
    
    (1,547
    )
    
    
    (4,984
    )Other
    
    
    (1,181
    )
    
    
    (2,811
    )
    
    
    (1,018
    )Income tax expense  continuing operations
    
    $
    126,892
    
    
    $
    136,142
    
    
    $
    102,202
  December 31,2005
    
    
    2004Current liability
    
    $
    (94,710
    )
    
    $
    (9,057
    )Long term liability
    
    
    (1,225,253
    )
    
    
    (1,227,553
    )Accumulated deferred income taxes  net
    
    $
    (1,319,963
    )
    
    $
    (1,236,610
    )
 90




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,2005
    
    
    2004DEFERRED TAX ASSETSRisk management and trading activities
    
    $
    323,696
    
    
    $
    91,021Regulatory liabilities:Asset retirement obligation
    
    
    189,726
    
    
    
    182,086Federal excess deferred income taxes
    
    
    14,446
    
    
    
    16,341Deferred fuel and purchased power 
mark-to-market
    
    
    11,923
    
    
    
    Other
    
    
    29,720
    
    
    
    8,282Pension liability
    
    
    83,753
    
    
    
    91,973Deferred gain on Palo Verde Unit 2 sale
leaseback
    
    
    17,868
    
    
    
    19,816Other
    
    
    91,015
    
    
    
    70,849Total deferred tax assets
    
    
    762,147
    
    
    
    480,368DEFERRED TAX LIABILITIESPlant-related
    
    
    (1,426,158
    )
    
    
    (1,516,174
    )Risk management and trading activities
    
    
    (524,940
    )
    
    
    (146,037
    )Regulatory assets:Deferred fuel and purchased power
    
    
    (67,461
    )
    
    
    Other
    
    
    (63,551
    )
    
    
    (54,767
    )Total deferred tax liabilities
    
    
    (2,082,110
    )
    
    
    (1,716,978
    )Accumulated deferred income taxes  net
    
    $
    (1,319,963
    )
    
    $
    (1,236,610
    )
 5. Lines of Credit and Short-Term Borrowings
   91




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    6. Long-Term Debt
  92




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31,Maturity
    
    
    InterestDates (a)
    
    
    Rates
    
    
    2005
    
    
    2004APSPollution control bonds (b)
    
    
    2024-2034
    
    
    
    (c
    )
    
    $
    565,855
    
    
    $
    565,860Pollution control bonds with senior
notes
    
    
    2029
    
    
    
    5.05
    %
    
    
    90,000
    
    
    
    90,000Unsecured notes (d)
    
    
    2005
    
    
    
    6.25
    %
    
    
    
    
    
    
    100,000Unsecured notes (e)
    
    
    2005
    
    
    
    7.625
    %
    
    
    
    
    
    
    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 (e)
    
    
    2014
    
    
    
    5.80
    %
    
    
    300,000
    
    
    
    300,000Secured note
    
    
    2014
    
    
    
    6.00
    %
    
    
    1,745
    
    
    
    1,900Senior notes
    
    
    2006
    
    
    
    6.75
    %
    
    
    83,695
    
    
    
    83,695Senior notes (f)
    
    
    2035
    
    
    
    5.50
    %
    
    
    250,000
    
    
    
    Unamortized discount and premium
    
    
    
    
    
    
    
    
    
    
    (9,151
    )
    
    
    (7,968
    )Capitalized lease obligations
    
    
    2006-2012
    
    
    
    (g
    )
    
    
    8,179
    
    
    
    9,854Subtotal
    
    
    
    
    
    
    
    
    
    
    2,565,323
    
    
    
    2,718,341SUNCORNotes payable
    
    
    2006-2008
    
    
    
    (h
    )
    
    
    129,040
    
    
    
    15,467Capitalized lease obligations
    
    
    2005-2007
    
    
    
    8.91
    %
    
    
    266
    
    
    
    507Subtotal
    
    
    
    
    
    
    
    
    
    
    129,306
    
    
    
    15,974PINNACLE WESTSenior notes (i)
    
    
    2006
    
    
    
    6.40
    %
    
    
    298,518
    
    
    
    302,589Unamortized discount and premium
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (143
    )Floating rate senior notes
    
    
    2005
    
    
    
    (j
    )
    
    
    
    
    
    
    165,000Capitalized lease obligations
    
    
    2005-2007
    
    
    
    5.45
    %
    
    
    284
    
    
    
    389Subtotal
    
    
    
    
    
    
    
    
    
    
    298,773
    
    
    
    467,835Total long-term debt
    
    
    
    
    
    
    
    
    
    
    2,993,402
    
    
    
    3,202,150Less current maturities
    
    
    
    
    
    
    
    
    
    
    384,947
    
    
    
    617,165TOTAL LONG-TERM DEBT LESS CURRENT
MATURITIES
    
    
    
    
    
    
    
    
    
    $
    2,608,455
    
    
    $
    2,584,985
 (a)
    
    This schedule does not reflect the timing of redemptions that may occur prior to
maturity.
 (b)
    
    On March 1, 2005, Maricopa County Arizona Pollution Control Corporation issued $164 million
of variable interest rate pollution control bonds, 2005 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.
 (c)
    
    The weighted-average rate was 3.25% at December 31, 2005 and 1.89% at December 31, 2004.
Changes in short-term interest rates would affect the costs associated with this debt.
 (d)
    
    On January 15, 2005, APS repaid its $100 million 6.25% notes due 2005. APS used cash on hand
to repay these notes.
 (e)
    
    On August 1, 2005, APS repaid $300 million of its 7.625% notes due 2005. APS used cash from
the issuance of $300 million 5.8% senior unsecured notes due June 30, 2014.
 93




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (f)
    
    On August 22, 2005, APS issued $250 million of 5.50% senior notes dues 2035. A portion of
the proceeds from the sale of the notes was used for general corporate purposes and, on
October 3, 2005, the balance of the proceeds, along with cash on hand, was used to fund the
$500 million that APS was obligated to transfer to Pinnacle West Energy in connection with
APS acquisition of the PWEC Dedicated Assets.
 (g)
    
    The weighted-average rate was 5.81% at December 31, 2005 and 5.78% at December 31, 2004.
Capital leases are included in property, plant and equipment on the Consolidated Balance
Sheets for both December 31, 2005 and December 31, 2004.
 (h)
    
    SunCor had $123 million outstanding at December 31, 2005 under its revolving line of credit.
The weighted-average interest rate was 5.93% at December 31, 2005. The remaining amount of
approximately $6 million at December 31, 2005 was made up of multiple notes with variable
interest rates based on the lenders prime rates plus 0.25% or LIBOR plus 2.00%. There is
also a note at a fixed rate of 4.25%.
 (i)
    
    On January 29, 2004, we entered into a fixed-for-floating interest rate swap transaction
related to the $300 million 6.40% senior note. The transaction qualifies as a fair value
hedge under SFAS No. 133.
 (j)
    
    The weighted-average rate was 2.06% at December 31, 2004.
     94




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year
    
    Pinnacle West
    
    APS2006
    
    $
    387
    
    
    $
    862007
    
    
    1
    
    
    
    12008
    
    
    129
    
    
    
    12009
    
    
    1
    
    
    
    12010
    
    
    224
    
    
    
    224Thereafter
    
    
    2,261
    
    
    
    2,261
 7. Common Stock and Treasury Stock
  Common Stock
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance 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
    )Common stock issuance (a)
    
    
    7,274,272
    
    
    
    298,330
    
    
    
    
    
    
    
    Purchase of
treasury stock (b)
    
    
    
    
    
    
    
    
    
    
    (28,124
    )
    
    
    (1,601
    )Reissuance of treasury stock
for stock compensation
(net)
    
    
    
    
    
    
    
    
    
    
    17,588
    
    
    
    784Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2005
    
    
    99,077,133
    
    
    $
    2,067,377
    
    
    
    (20,058
    )
    
    $
    (1,245
    )
 (a)
    
    On May 2, 2005, Pinnacle West issued 6,095,000 shares of its common stock at an
offering price of $42 per share, resulting in net proceeds of approximately $248
million. Pinnacle West used the net proceeds for general corporate purposes, including
making capital contributions to APS, which, in turn, used such funds to pay a portion
of the approximately $190 million purchase price to acquire the Sundance Plant and for
other capital expenditures incurred to meet the growing needs of APS service
territory.(b)
    
    Represents shares of common stock withheld from certain stock
awards for tax purposes.
 95




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8. Retirement Plans and Other Benefits
      96




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Pension
    
    
    Other Benefits2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Service cost-benefits
earned during the
period
    
    $
    45,027
    
    
    $
    41,207
    
    
    $
    37,662
    
    
    $
    20,913
    
    
    $
    17,557
    
    
    $
    15,858Interest cost on benefit
obligation
    
    
    87,189
    
    
    
    81,873
    
    
    
    76,951
    
    
    
    34,223
    
    
    
    29,488
    
    
    
    30,163Expected return on plan
assets
    
    
    (88,403
    )
    
    
    (78,790
    )
    
    
    (65,046
    )
    
    
    (30,471
    )
    
    
    (24,773
    )
    
    
    (18,762
    )Amortization of:Transition
(asset) obligation
    
    
    (3,227
    )
    
    
    (3,227
    )
    
    
    (3,227
    )
    
    
    3,005
    
    
    
    3,005
    
    
    
    3,005Prior service
cost (credit)
    
    
    2,401
    
    
    
    2,401
    
    
    
    2,401
    
    
    
    (125
    )
    
    
    (125
    )
    
    
    (125
    )Net actuarial
loss
    
    
    19,810
    
    
    
    17,946
    
    
    
    18,135
    
    
    
    9,243
    
    
    
    7,414
    
    
    
    9,714Net periodic benefit cost
    
    $
    62,797
    
    
    $
    61,410
    
    
    $
    66,876
    
    
    $
    36,788
    
    
    $
    32,566
    
    
    $
    39,853Portion of cost charged to
expense
    
    $
    26,375
    
    
    $
    25,792
    
    
    $
    30,094
    
    
    $
    15,451
    
    
    $
    13,678
    
    
    $
    17,934APS share of costs charged to
expense
    
    $
    24,169
    
    
    $
    22,483
    
    
    $
    25,450
    
    
    $
    14,159
    
    
    $
    11,923
    
    
    $
    15,166
  Pension
    
    
    Other Benefits2005
    
    
    2004
    
    
    2005
    
    
    2004Benefit obligation at January 1
    
    $
    1,454,244
    
    
    $
    1,307,628
    
    
    $
    536,213
    
    
    $
    540,181Service cost
    
    
    45,027
    
    
    
    41,207
    
    
    
    20,913
    
    
    
    17,557Interest cost
    
    
    87,189
    
    
    
    81,873
    
    
    
    34,223
    
    
    
    29,488Benefit payments
    
    
    (46,109
    )
    
    
    (45,195
    )
    
    
    (16,962
    )
    
    
    (14,332
    )Actuarial losses (gains)
    
    
    55,717
    
    
    
    68,731
    
    
    
    11,291
    
    
    
    (36,681
    )Benefit obligation at December 31
    
    $
    1,596,068
    
    
    $
    1,454,244
    
    
    $
    585,678
    
    
    $
    536,213
  Pension
    
    
    Other Benefits2005
    
    
    2004
    
    
    2005
    
    
    2004Fair value of plan assets
at January 1
    
    $
    982,282
    
    
    $
    887,311
    
    
    $
    352,084
    
    
    $
    294,051Actual return on plan assets
    
    
    73,298
    
    
    
    102,829
    
    
    
    27,302
    
    
    
    32,433Employer contributions
    
    
    52,700
    
    
    
    35,000
    
    
    
    36,788
    
    
    
    32,600Benefit payments
    
    
    (43,432
    )
    
    
    (42,858
    )
    
    
    
    
    
    
    (7,000
    )Fair value of plan assets at
December 31
    
    $
    1,064,848
    
    
    $
    982,282
    
    
    $
    416,174
    
    
    $
    352,084
 97




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Pension
    
    
    Other Benefits2005
    
    
    2004
    
    
    2005
    
    
    2004Funded status at December 31
    
    $
    (531,220
    )
    
    $
    (471,962
    )
    
    $
    (169,504
    )
    
    $
    (184,129
    )Unrecognized net transition (asset)
obligation
    
    
    (645
    )
    
    
    (3,873
    )
    
    
    21,034
    
    
    
    24,039Unrecognized prior service
cost (credit)
    
    
    11,833
    
    
    
    14,234
    
    
    
    (1,296
    )
    
    
    (1,422
    )Unrecognized net actuarial
losses
    
    
    426,991
    
    
    
    375,980
    
    
    
    170,011
    
    
    
    158,271Benefit (liability) asset
recognized in
the Consolidated Balance Sheets
    
    $
    (93,041
    )
    
    $
    (85,621
    )
    
    $
    20,245
    
    
    $
    (3,241
    )
  2005
    
    
    2004Projected benefit obligation
    
    $
    1,596,068
    
    
    $
    1,454,244Accumulated benefit obligation
    
    $
    1,329,324
    
    
    $
    1,216,727Less fair value of plan assets
    
    
    1,064,848
    
    
    
    982,282Pinnacle West pension liability
    
    $
    264,476
    
    
    $
    234,445APS share of pension liability
    
    $
    233,342
    
    
    $
    203,668
  Pension
    
    
    Other Benefits2005
    
    
    2004
    
    
    2005
    
    
    2004(Accrued) prepaid benefit cost
    
    $
    (93,041
    )
    
    $
    (85,621
    )
    
    $
    20,245
    
    
    $
    (3,241
    )Additional minimum liability
    
    
    (171,435
    )
    
    
    (148,824
    )
    
    
    
    
    
    
    Total (liability) asset
    
    
    (264,476
    )
    
    
    (234,445
    )
    
    
    20,245
    
    
    
    (3,241
    )Intangible asset
    
    
    11,833
    
    
    
    14,234
    
    
    
    
    
    
    
    Accumulated other comprehensive
loss (pretax)
    
    
    159,602
    
    
    
    134,590
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    (93,041
    )
    
    $
    (85,621
    )
    
    $
    20,245
    
    
    $
    (3,241
    )
 98




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2005
    
    
    2004Increase in minimum liability included in other
comprehensive income  net of tax:Pinnacle West consolidated
    
    $
    (15,489
    )
    
    $
    (15,224
    )APS share
    
    $
    (15,045
    )
    
    $
    (13,929
    )
  Benefit CostsBenefit Obligations
    
    For the Years EndedAs of December 31,
    
    December 31,2005
    
    2004
    
    2005
    
    2004Discount rate-pension
    
    
    5.66
    %
    
    
    5.84
    %
    
    
    5.84
    %
    
    
    6.10
    %Discount rate-other benefits
    
    
    5.68
    %
    
    
    5.92
    %
    
    
    5.92
    %
    
    
    6.10
    %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
    
    
    2010
    
    
    
    2009
    
    
    
    2009
    
    
    
    2008
   99




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1% Increase
    
    1% DecreaseEffect on other postretirement benefits
expense, after consideration of amounts
capitalized or billed to electric plant
participants
    
    $
    7
    
    
    $
    (6
    )Effect on service and interest cost
components of net periodic other
postretirement benefit costs
    
    $
    11
    
    
    $
    (9
    )Effect on the accumulated other
postretirement benefit obligation
    
    $
    100
    
    
    $
    (79
    )
 Plan Assets
  Percentage of Plan Assetsat December 31,
    
    
    Target Asset Allocation2005
    
    
    2004Asset Category:Equity securities
    
    
    59
    %
    
    
    60
    %
    
    
    60
    %Fixed income
    
    
    26
    
    
    
    27
    
    
    
    30
    %Other
    
    
    15
    
    
    
    13
    
    
    
    10
    %Total
    
    
    100
    %
    
    
    100
    %
   Percentage of Plan Assetsat December 31,
    
    
    Target Asset Allocation2005
    
    
    2004Asset Category:Equity securities
    
    
    69
    %
    
    
    71
    %
    
    
    70
    %Fixed income
    
    
    26
    
    
    
    23
    
    
    
    27
    %Other
    
    
    5
    
    
    
    6
    
    
    
    3
    %Total
    
    
    100
    %
    
    
    100
    %
  100




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Contributions
  Estimated Future Benefit Payments
  Year
    
    Pension
    
    
    Other Benefits (a)2006
    
    $
    52,675
    
    
    $
    16,3402007
    
    
    56,891
    
    
    
    17,7512008
    
    
    62,263
    
    
    
    19,1662009
    
    
    68,651
    
    
    
    20,7752010
    
    
    75,273
    
    
    
    22,847Years 2011-2015
    
    
    520,961
    
    
    
    149,784
 
 (a)
    
    The expected future other benefit payments take into account the Medicare Part
D subsidy. Employee Savings Plan Benefits
  9. Leases
  101




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Pinnacle WestYear
    
    Consolidated
    
    
    APS2006
    
    $
    74
    
    
    $
    662007
    
    
    73
    
    
    
    652008
    
    
    71
    
    
    
    642009
    
    
    68
    
    
    
    622010
    
    
    65
    
    
    
    60Thereafter
    
    
    303
    
    
    
    288Total future lease commitments
    
    $
    654
    
    
    $
    605
 10. Jointly-Owned Facilities
  102




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 ConstructionPercent
    
    Plant in
    
    Accumulated
    
    Work inOwned
    
    Service
    
    Depreciation
    
    ProgressGenerating facilities:Palo Verde Units 1 and 3
    
    
    29.1
    %
    
    $
    1,931,736
    
    
    $
    923,052
    
    
    $
    41,391Palo Verde Unit 2 (see Note
9)
    
    
    17.0
    %
    
    
    671,775
    
    
    
    260,840
    
    
    
    6,363Four Corners Units 4 and 5
    
    
    15.0
    %
    
    
    158,129
    
    
    
    78,588
    
    
    
    317Navajo Generating Station
Units 1, 2 and 3
    
    
    14.0
    %
    
    
    252,348
    
    
    
    108,182
    
    
    
    3,963Cholla common facilities (a)
    
    
    62.6
    %(b)
    
    
    87,165
    
    
    
    38,832
    
    
    
    2,109Transmission facilities:ANPP 500KV System
    
    
    35.8
    %(b)
    
    
    81,117
    
    
    
    22,829
    
    
    
    815Navajo Southern System
    
    
    31.4
    %(b)
    
    
    29,809
    
    
    
    13,273
    
    
    
    6,813Palo Verde  Yuma 500KV
System
    
    
    23.9
    %(b)
    
    
    9,580
    
    
    
    3,945
    
    
    
    386Four Corners Switchyards
    
    
    27.5
    %(b)
    
    
    3,120
    
    
    
    1,267
    
    
    
    Phoenix  Mead System
    
    
    17.1
    %(b)
    
    
    36,020
    
    
    
    3,770
    
    
    
    Palo Verde  Estrella 500KV
System
    
    
    55.5
    %(b)
    
    
    74,243
    
    
    
    2,023
    
    
    
    Harquahala
    
    
    80.0
    %(b)
    
    
    
    
    
    
    
    
    
    
    112
 
 (a)
    
    PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common
facilities at Cholla are jointly-owned.(b)
    
    Weighted average of interests. 11. Commitments and Contingencies
 Palo Verde Nuclear Generating Station
 Spent Nuclear Fuel and Waste Disposal
   103




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Nuclear Insurance
   Fuel and Purchased Power Commitments
  104




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Actual
    
    Estimated (a)2003
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    ThereafterCoal take-or-pay
commitments
    
    $
    43
    
    
    $
    41
    
    
    $
    48
    
    
    $
    67
    
    
    $
    69
    
    
    $
    78
    
    
    $
    93
    
    
    $
    73
    
    
    $
    611
 
 (a)
    
    Total take-or-pay commitments are approximately $991 million. The total net
present value of these commitments is approximately $598 million. Coal Mine Reclamation Obligations
  California Energy Market Issues and Refunds in the Pacific Northwest
 FERC
  105




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    California Civil Energy Market Litigation
  106




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Construction Program
  APS
    
    $
    649SunCor
    
    
    232Other
    
    
    6Total
    
    $
    887
 Natural Gas Supply
    Navajo Nation Litigation
  107




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Superfund
 nd
 Litigation
  12. Asset Retirement Obligations
     108




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##### Table of Contents



PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 .
 Total
    
    
    TotalUnrealized
    
    
    UnrealizedFair Value
    
    
    Gains
    
    
    Losses2005Equity securities
    
    $
    150
    
    
    $
    50
    
    
    $
    Debt securities
    
    
    144
    
    
    
    3
    
    
    
    1Total
    
    $
    294
    
    
    $
    53
    
    
    $
    12004Equity securities
    
    $
    135
    
    
    $
    45
    
    
    $
    Debt securities
    
    
    133
    
    
    
    6
    
    
    
    Total
    
    $
    268
    
    
    $
    51
    
    
    $
    
  Year Ended December 31,2005
    
    2004
    
    2003Realized gains
    
    $
    6
    
    
    $
    1
    
    
    $
    2Realized losses
    
    
    (6
    )
    
    
    (2
    )
    
    
    (1
    )Proceeds from the sale of securities
    
    
    186
    
    
    
    124
    
    
    
    169
  Fair Value(in millions)Less than one year
    
    $
    181 year
 5 years
    
    
    355 years
 10 years
    
    
    36Greater than 10 years
    
    
    55Total
    
    $
    144
 109




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2005
    
    
    2004Asset retirement obligation at the
beginning of year
    
    $
    252
    
    
    $
    234Changes attributable to:Liabilities settled
    
    
    (2
    )
    
    
    (1
    )Accretion expense
    
    
    17
    
    
    
    17Estimated cash flow revisions
    
    
    2
    
    
    
    2Asset retirement obligation at the
end of year
    
    $
    269
    
    
    $
    252
  110




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 13. Selected Quarterly Financial Data (Unaudited)
   2005 Quarter Ended
    
    2005March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalAs originally reported:Operating revenues
    
    $
    615,087
    
    
    $
    755,836
    
    
    $
    955,583Operations and maintenance
    
    
    156,496
    
    
    
    153,097
    
    
    
    158,940Operating income
    
    
    85,256
    
    
    
    178,627
    
    
    
    162,113Income taxes
    
    
    14,732
    
    
    
    55,024
    
    
    
    40,305Income from continuing
operations
    
    
    23,656
    
    
    
    85,156
    
    
    
    84,694SunCor
reclassifications
(see Note 22):Operating revenues
    
    
    (2,120
    )
    
    
    (494
    )
    
    
    Operating income
    
    
    (529
    )
    
    
    205
    
    
    
    (268
    )Income taxes
    
    
    (91
    )
    
    
    (36
    )
    
    
    Income from continuing
operations
    
    
    (142
    )
    
    
    (55
    )
    
    
    Silverhawk
reclassifications
(see Note 22):Operating revenues
    
    
    (27,609
    )
    
    
    
    
    
    
    Operations and maintenance
    
    
    (1,412
    )
    
    
    
    
    
    
    Operating income
    
    
    7,098
    
    
    
    
    
    
    
    Income taxes
    
    
    3,929
    
    
    
    
    
    
    
    Income from continuing
operations
    
    
    6,085
    
    
    
    
    
    
    
    After SunCor and
Silverhawk
reclassifications:Operating revenues
    
    $
    585,358
    
    
    $
    755,342
    
    
    $
    955,583
    
    
    $
    691,672
    
    
    $
    2,987,955Operations and maintenance
    
    
    155,084
    
    
    
    153,097
    
    
    
    158,940
    
    
    
    168,706
    
    
    
    635,827Operating income
    
    
    91,825
    
    
    
    178,832
    
    
    
    161,845
    
    
    
    82,787
    
    
    
    515,289Income taxes
    
    
    18,570
    
    
    
    54,988
    
    
    
    40,305
    
    
    
    13,029
    
    
    
    126,892Income from continuing
operations
    
    
    29,599
    
    
    
    85,101
    
    
    
    84,694
    
    
    
    23,769
    
    
    
    223,163Net income
    
    
    24,448
    
    
    
    26,735
    
    
    
    103,737
    
    
    
    21,347
    
    
    
    176,267
 111




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2004 Quarter Ended
    
    2004March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalAs originally reported: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
    
    
    31,426
    
    
    
    72,640
    
    
    
    105,400
    
    
    
    33,729
    
    
    
    243,195SunCor
reclassifications (see Note 22):Operating revenues
    
    
    (2,293
    )
    
    
    (2,592
    )
    
    
    (2,318
    )
    
    
    (2,274
    )
    
    
    (9,477
    )Operating income
    
    
    (552
    )
    
    
    (625
    )
    
    
    (415
    )
    
    
    375
    
    
    
    (1,217
    )Income taxes
    
    
    (26
    )
    
    
    (48
    )
    
    
    51
    
    
    
    168
    
    
    
    145Income from continuing
operations
    
    
    (41
    )
    
    
    (75
    )
    
    
    80
    
    
    
    261
    
    
    
    225Silverhawk
reclassifications (See Note 22):Operating revenues
    
    
    301
    
    
    
    (5,084
    )
    
    
    (37,296
    )
    
    
    (19,163
    )
    
    
    (61,242
    )Operations and maintenance
    
    
    
    
    
    
    (380
    )
    
    
    (2,158
    )
    
    
    (1,699
    )
    
    
    (4,237
    )Operating income
    
    
    300
    
    
    
    3,002
    
    
    
    (1,065
    )
    
    
    10,686
    
    
    
    12,923Income taxes
    
    
    (108
    )
    
    
    1,801
    
    
    
    232
    
    
    
    5,215
    
    
    
    7,140Income from continuing
operations
    
    
    (170
    )
    
    
    2,813
    
    
    
    363
    
    
    
    8,141
    
    
    
    11,147After SunCor and
Silverhawk
reclassifications:Operating revenues
    
    $
    564,353
    
    
    $
    704,207
    
    
    $
    847,165
    
    
    $
    713,281
    
    
    $
    2,829,006Operations and maintenance
    
    
    137,386
    
    
    
    138,595
    
    
    
    158,607
    
    
    
    157,732
    
    
    
    592,320Operating income
    
    
    83,946
    
    
    
    122,857
    
    
    
    209,356
    
    
    
    101,806
    
    
    
    517,965Income taxes
    
    
    15,334
    
    
    
    44,959
    
    
    
    59,183
    
    
    
    16,666
    
    
    
    136,142Income from continuing
operations
    
    
    30,580
    
    
    
    73,961
    
    
    
    104,329
    
    
    
    37,720
    
    
    
    246,590Net income
    
    
    31,426
    
    
    
    72,640
    
    
    
    105,400
    
    
    
    33,729
    
    
    
    243,195
 112




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2005 Quarter EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,As
originally reported  Basic earnings per share
(a):Income from continuing operations
    
    $
    0.26
    
    
    $
    0.89
    
    
    $
    0.86
    
    
    $
    0.24Net income
    
    
    0.27
    
    
    
    0.28
    
    
    
    1.05
    
    
    
    0.22After SunCor
and Silverhawk reclassifications  Basic
earnings per share (a):Income from continuing operations
    
    
    0.32
    
    
    
    0.88
    
    
    
    0.86
    
    
    
    0.24Net income
    
    
    0.27
    
    
    
    0.28
    
    
    
    1.05
    
    
    
    0.22As
originally reported  Diluted earnings per
share (a):Income from continuing operations
    
    
    0.26
    
    
    
    0.88
    
    
    
    0.86
    
    
    
    0.24Net income
    
    
    0.27
    
    
    
    0.28
    
    
    
    1.05
    
    
    
    0.22After
SunCor and Silverhawk reclassifications 
Diluted earnings per share (a):Income from continuing operations
    
    $
    0.32
    
    
    $
    0.88
    
    
    $
    0.86
    
    
    $
    0.24Net income
    
    
    0.27
    
    
    
    0.28
    
    
    
    1.05
    
    
    
    0.22
 2004 Quarter EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,As
originally reported  Basic earnings per share
(a):Income from continuing operations
    
    $
    0.34
    
    
    $
    0.78
    
    
    $
    1.14
    
    
    $
    0.32Net income
    
    
    0.34
    
    
    
    0.80
    
    
    
    1.15
    
    
    
    0.37After SunCor
and Silverhawk reclassifications  Basic
earnings per share (a):Income from continuing operations
    
    
    0.33
    
    
    
    0.81
    
    
    
    1.14
    
    
    
    0.41Net income
    
    
    0.34
    
    
    
    0.80
    
    
    
    1.15
    
    
    
    0.37As
originally reported  Diluted earnings per
share (a):Income from continuing operations
    
    
    0.34
    
    
    
    0.78
    
    
    
    1.14
    
    
    
    0.32Net income
    
    
    0.34
    
    
    
    0.79
    
    
    
    1.15
    
    
    
    0.37After
SunCor and Silverhawk reclassifications 
Diluted earnings per share (a):Income from continuing operations
    
    $
    0.33
    
    
    $
    0.81
    
    
    $
    1.14
    
    
    $
    0.41Net income
    
    
    0.34
    
    
    
    0.79
    
    
    
    1.15
    
    
    
    0.37
 
 (a)
    
    The difference between originally reported and revised basic and diluted earnings per
share related to the sale of certain commercial properties at SunCor and the sale of
Silverhawk (see Note 22), which changed reported amounts for the quarters in 2005 and 2004. 113




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14. Fair Value of Financial Instruments
     15. Earnings Per Share
  2005
    
    
    2004
    
    
    2003Basic earnings per share:Income from continuing operations
    
    $
    2.31
    
    
    $
    2.70
    
    
    $
    2.47Income (loss) from discontinued
operations
    
    
    (0.48
    )
    
    
    (0.04
    )
    
    
    0.17Earnings per share  basic
    
    $
    1.83
    
    
    $
    2.66
    
    
    $
    2.64Diluted earnings per share:Income from continuing operations
    
    $
    2.31
    
    
    $
    2.69
    
    
    $
    2.47Income (loss) from discontinued
operations
    
    
    (.49
    )
    
    
    (0.03
    )
    
    
    0.16Earnings per share  diluted
    
    $
    1.82
    
    
    $
    2.66
    
    
    $
    2.63
  114




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  16. Stock-Based Compensation
        115




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2005
    
    
    
    
    
    2004
    
    
    
    
    
    2003Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    Average2005
    
    Exercise
    
    2004
    
    Exercise
    
    2003
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at
beginning of
year
    
    
    2,276,123
    
    
    $
    39.14
    
    
    
    2,698,246
    
    
    $
    38.56
    
    
    
    2,185,129
    
    
    $
    39.96Granted
    
    
    
    
    
    
    
    
    
    
    37,580
    
    
    
    37.85
    
    
    
    621,875
    
    
    
    32.29Exercised
    
    
    (478,851
    )
    
    
    36.54
    
    
    
    (372,205
    )
    
    
    34.02
    
    
    
    (62,366
    )
    
    
    26.09Forfeited
    
    
    (101,500
    )
    
    
    43.04
    
    
    
    (87,498
    )
    
    
    42.31
    
    
    
    (46,392
    )
    
    
    37.61Outstanding at
year-end
    
    
    1,695,772
    
    
    
    39.65
    
    
    
    2,276,123
    
    
    
    39.14
    
    
    
    2,698,246
    
    
    
    38.56Options
exercisable
at year-end
    
    
    1,499,302
    
    
    
    40.55
    
    
    
    1,859,340
    
    
    
    40.59
    
    
    
    1,787,622
    
    
    
    40.35Weighted-average
grant date
fair value of
options granted
during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3.53
    
    
    
    
    
    
    $
    7.37
  WeightedWeighted
    
    Average
    
    
    
    
    
    WeightedAverage
    
    Remaining
    
    
    
    
    
    AverageExercise
    
    Options
    
    Exercise
    
    Contract
    
    Options
    
    ExercisePrices Per Share
    
    Outstanding
    
    Price
    
    Life (Years)
    
    Exercisable
    
    Price$28.07  32.75
    
    
    341,902
    
    
    $
    32.24
    
    
    
    6.6
    
    
    
    160,372
    
    
    $
    32.1832.75  37.42
    
    
    67,081
    
    
    
    34.66
    
    
    
    3.7
    
    
    
    67,081
    
    
    
    34.6637.42  42.10
    
    
    540,855
    
    
    
    38.89
    
    
    
    5.2
    
    
    
    525,915
    
    
    
    38.9242.10  46.78
    
    
    745,934
    
    
    
    44.04
    
    
    
    4.6
    
    
    
    745,934
    
    
    
    44.041,695,772
    
    
    
    
    
    
    
    
    
    
    
    1,499,302
 116




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2005 Grant
    
    
    
    
    
    2004 Grant
    
    
    
    
    
    2003 Grant2005
    
    Date Fair
    
    2004
    
    Date Fair
    
    2003
    
    Date FairShares
    
    Value
    
    Shares
    
    Value
    
    Shares
    
    ValueRestricted stock
    
    
    
    
    
    $
    
    
    
    
    4,000
    
    
    $
    37.68
    (a)
    
    
    4,000
    
    
    $
    32.20
    (a)Performance share
awards
    
    
    215,300
    
    
    
    41.36
    (b)
    
    
    215,285
    
    
    
    37.85
    (b)
    
    
    119,085
    
    
    
    32.29
    (b)Stock ownership
incentive awards
    
    
    11,322
    
    
    
    44.13
    (b)
    
    
    9,015
    
    
    
    40.29
    (b)
    
    
    
    
    
    
    
 
 (a)
    
    Restricted stock priced at the average of the high and low market price on the
grant date.(b)
    
    Performance shares and stock ownership incentive awards priced at the closing
market price on the grant date. 17. Business Segments
  
    
    our regulated electricity segment, which consists of traditional regulated retail
and wholesale electricity businesses (primarily electricity service to Native Load
customers) and related activities and includes electricity generation, transmission and
distribution;
    
    our real estate segment, which consists of SunCors real estate development and
investment activities; and
    
    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.
  117




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Business Segments for the Year Ended December 31, 2005Regulated
    
    
    
    
    
    
    MarketingElectricity
    
    
    Real Estate
    
    
    and Trading
    
    
    Other
    
    
    TotalOperating revenues (a)
    
    $
    2,237
    
    
    $
    338
    
    
    $
    352
    
    
    $
    61
    
    
    $
    2,988Purchased power and fuel costs
    
    
    595
    
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    888Other operating expenses
    
    
    740
    
    
    
    278
    
    
    
    28
    
    
    
    52
    
    
    
    1,098Regulatory disallowance
(see Note 3)
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139Operating margin
    
    
    763
    
    
    
    60
    
    
    
    31
    
    
    
    9
    
    
    
    863Depreciation and amortization
    
    
    343
    
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    348Interest expense
    
    
    169
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    173Other expense (income)
    
    
    (6
    )
    
    
    (3
    )
    
    
    
    
    
    
    1
    
    
    
    (8
    )Income from continuing
operations before income taxes
    
    
    257
    
    
    
    58
    
    
    
    27
    
    
    
    8
    
    
    
    350Income taxes
    
    
    90
    
    
    
    23
    
    
    
    11
    
    
    
    3
    
    
    
    127Income from continuing operations
    
    
    167
    
    
    
    35
    
    
    
    16
    
    
    
    5
    
    
    
    223Income (loss) from discontinued
operations  net of income
tax benefit of $(30) (see Note
22) (b)(c)
    
    
    
    
    
    
    17
    
    
    
    (67
    )
    
    
    3
    
    
    
    (47
    )Net income (loss)
    
    $
    167
    
    
    $
    52
    
    
    $
    (51
    )
    
    $
    8
    
    
    $
    176Total assets
    
    $
    9,732
    
    
    $
    483
    
    
    $
    1,070
    
    
    $
    38
    
    
    $
    11,323Capital expenditures
    
    $
    811
    
    
    $
    106
    
    
    $
    11
    
    
    $
    
    
    
    $
    928
 Business Segments for the Year Ended December 31, 2004Regulated
    
    
    
    
    
    
    MarketingElectricity
    
    
    Real Estate
    
    
    and Trading
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    2,035
    
    
    $
    350
    
    
    $
    401
    
    
    $
    43
    
    
    $
    2,829Purchased power and fuel costs
    
    
    567
    
    
    
    
    
    
    
    321
    
    
    
    
    
    
    
    888Other operating expenses
    
    
    683
    
    
    
    284
    
    
    
    30
    
    
    
    34
    
    
    
    1,031Operating margin
    
    
    785
    
    
    
    66
    
    
    
    50
    
    
    
    9
    
    
    
    910Depreciation and amortization
    
    
    384
    
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    392Interest expense
    
    
    170
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    172Other expense (income) (d)
    
    
    4
    
    
    
    (6
    )
    
    
    (2
    )
    
    
    (33
    )
    
    
    (37
    )Income from continuing
operations before income taxes
    
    
    227
    
    
    
    67
    
    
    
    47
    
    
    
    42
    
    
    
    383Income taxes
    
    
    75
    
    
    
    27
    
    
    
    18
    
    
    
    16
    
    
    
    136Income from continuing operations
    
    
    152
    
    
    
    40
    
    
    
    29
    
    
    
    26
    
    
    
    247Income (loss) from discontinued
operations  net of income
tax benefit of $(2) (see Note
22) (b)(c)
    
    
    
    
    
    
    4
    
    
    
    (12
    )
    
    
    4
    
    
    
    (4
    )Net income
    
    $
    152
    
    
    $
    44
    
    
    $
    17
    
    
    $
    30
    
    
    $
    243Total assets
    
    $
    8,674
    
    
    $
    454
    
    
    $
    746
    
    
    $
    23
    
    
    $
    9,897Capital expenditures
    
    $
    483
    
    
    $
    81
    
    
    $
    34
    
    
    $
    
    
    
    $
    598
 118




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Business Segments for the Year Ended December 31, 2003Regulated
    
    
    
    
    
    
    MarketingElectricity
    
    
    Real Estate
    
    
    and Trading
    
    
    Other
    
    
    TotalOperating revenues
    
    $
    1,978
    
    
    $
    362
    
    
    $
    391
    
    
    $
    28
    
    
    $
    2,759Purchased power and fuel costs
    
    
    517
    
    
    
    
    
    
    
    345
    
    
    
    
    
    
    
    862Other operating expenses
    
    
    625
    
    
    
    306
    
    
    
    34
    
    
    
    24
    
    
    
    989Operating margin
    
    
    836
    
    
    
    56
    
    
    
    12
    
    
    
    4
    
    
    
    908Depreciation and amortization
    
    
    428
    
    
    
    6
    
    
    
    1
    
    
    
    
    
    
    
    435Interest expense
    
    
    172
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    174Other expense (income)
    
    
    (4
    )
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    (29
    )Income from continuing
operations before income taxes
    
    
    240
    
    
    
    73
    
    
    
    11
    
    
    
    4
    
    
    
    328Income taxes
    
    
    70
    
    
    
    28
    
    
    
    3
    
    
    
    2
    
    
    
    103Income from continuing operations
    
    
    170
    
    
    
    45
    
    
    
    8
    
    
    
    2
    
    
    
    225Income from discontinued
operations  net of income
taxes of $9 (see Note 22)
(b)(c)
    
    
    
    
    
    
    10
    
    
    
    1
    
    
    
    5
    
    
    
    16Net income
    
    $
    170
    
    
    $
    55
    
    
    $
    9
    
    
    $
    7
    
    
    $
    241Capital expenditures
    
    $
    686
    
    
    $
    72
    
    
    $
    9
    
    
    $
    
    
    
    $
    767
 
 (a)
    
    Effective April 1, 2005, revenues of approximately $40 million from Off-System
Sales, which were previously reported in the marketing and trading segment, began being
reported in the regulated electricity segment in accordance with the retail rate case
settlement.(b)
    
    The marketing and trading segment relates to the sale and operations of
Silverhawk. See Note 22.(c)
    
    The other segment relates to the sale and operations of NAC. See Note 22.(d)
    
    The other segment includes a $35 million pre-tax ($21 million after-tax) gain
related to the sale of a limited partnership interest in the Phoenix Suns in 2004. 18. Derivative and Energy Trading Accounting
  119




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       120




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Cash Flow Hedges
  2005
    
    
    2004
    
    
    2003Gains (losses) on the ineffective
portion of
derivatives qualifying for hedge
accounting
    
    $
    14,289
    
    
    $
    (1,568
    )
    
    $
    8,237Gains from the change in options
time value excluded from measurement
of effectiveness
    
    
    620
    
    
    
    185
    
    
    
    181Gains from the discontinuance of
cash flow hedges
    
    
    556
    
    
    
    1,137
    
    
    
    
     Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetAssets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Regulated electricity:Mark-to-market
    
    $
    516,399
    
    
    $
    228,873
    
    
    $
    (335,801
    )
    
    $
    (74,787
    )
    
    $
    334,684Margin account
and options
    
    
    1,814
    
    
    
    
    
    
    
    (124,165
    )
    
    
    
    
    
    
    (122,351
    )Marketing
and trading:Mark-to-market
    
    
    307,883
    
    
    
    291,122
    
    
    
    (236,922
    )
    
    
    (181,417
    )
    
    
    180,666Options and
emission
allowances
 at cost
    
    
    1,683
    
    
    
    77,836
    
    
    
    (23,805
    )
    
    
    (209
    )
    
    
    55,505Total
    
    $
    827,779
    
    
    $
    597,831
    
    
    $
    (720,693
    )
    
    $
    (256,413
    )
    
    $
    448,504
 121




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetAssets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Regulated electricity:Mark-to-market
    
    $
    45,220
    
    
    $
    19,417
    
    
    $
    (19,191
    )
    
    $
    (12,000
    )
    
    $
    33,446Margin account
and options
    
    
    18,821
    
    
    
    118
    
    
    
    (8,879
    )
    
    
    
    
    
    
    10,060Marketing
and trading:Mark-to-market
    
    
    102,855
    
    
    
    204,512
    
    
    
    (68,008
    )
    
    
    (132,683
    )
    
    
    106,676Options and
emission
allowances
 at cost
    
    
    
    
    
    
    294
    
    
    
    (17,328
    )
    
    
    (11,579
    )
    
    
    (28,613
    )Total
    
    $
    166,896
    
    
    $
    224,341
    
    
    $
    (113,406
    )
    
    $
    (156,262
    )
    
    $
    121,569
   Fair Value Hedges
  Credit Risk
  122




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  19. Other Income and Other Expense
  2005
    
    
    2004
    
    
    2003Other income:Investment gains  net (a)
    
    $
    752
    
    
    $
    38,256
    
    
    $
    3,649Interest income
    
    
    14,793
    
    
    
    6,770
    
    
    
    4,412SunCor (b)
    
    
    2,623
    
    
    
    4,458
    
    
    
    24,740Asset sales
    
    
    3,187
    
    
    
    3,026
    
    
    
    618Miscellaneous
    
    
    2,005
    
    
    
    779
    
    
    
    2,144Total other income
    
    $
    23,360
    
    
    $
    53,289
    
    
    $
    35,563Other expense:Non-operating costs (c)
    
    $
    (13,589
    )
    
    $
    (15,524
    )
    
    $
    (14,959
    )Asset dispositions
    
    
    (9,759
    )
    
    
    (1,212
    )
    
    
    (1,522
    )Miscellaneous
    
    
    (3,368
    )
    
    
    (4,604
    )
    
    
    (4,093
    )Total other expense
    
    $
    (26,716
    )
    
    $
    (21,340
    )
    
    $
    (20,574
    )
 
 (a)
    
    Includes a $35 million gain ($21 million after tax) related to the sale of a limited
partnership interest in the Phoenix Suns in 2004.(b)
    
    Primarily related to the sale at SunCor of a land interest and profit participation agreement
in 2003 for $18 million. Includes joint venture and other non-operating income.(c)
    
    As defined by the FERC, includes below-the-line non-operating utility costs (primarily
community relations and other costs excluded from utility rate recovery). 20. Variable-Interest Entities
  123




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   21. Guarantees
  Guarantees
    
    
    Surety BondsTerm
    
    
    
    
    
    
    TermAmount
    
    
    (in years)
    
    
    Amount
    
    
    (in years)Parental:Pinnacle West Energy
    
    $
    5
    
    
    
    1
    
    
    $
    
    
    
    
    APS Energy Services
    
    
    20
    
    
    
    1
    
    
    
    65
    
    
    
    1Total
    
    $
    25
    
    
    
    
    
    
    $
    65
   124




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   22. Discontinued Operations
 Silverhawk 
  SunCor 
 NAC 
  125




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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2005
    
    
    2004
    
    
    2003Revenue:Silverhawk
    
    $
    95
    
    
    $
    61
    
    
    $
    1SunCor  commercial operations
    
    
    9
    
    
    
    21
    
    
    
    71NAC
    
    
    
    
    
    
    34
    
    
    
    58Total revenue
    
    $
    104
    
    
    $
    116
    
    
    $
    130Income (loss) before taxes:Silverhawk (a)
    
    $
    (111
    )
    
    $
    (18
    )
    
    $
    SunCor  commercial operations
    
    
    28
    
    
    
    6
    
    
    
    17NAC
    
    
    6
    
    
    
    7
    
    
    
    8Total income (loss) before taxes
    
    $
    (77
    )
    
    $
    (5
    )
    
    $
    25Income (loss) after taxes:Silverhawk
    
    $
    (67
    )
    
    $
    (12
    )
    
    $
    1SunCor  commercial operations
    
    
    17
    
    
    
    4
    
    
    
    10NAC
    
    
    3
    
    
    
    4
    
    
    
    5Total income (loss) after taxes
    
    $
    (47
    )
    
    $
    (4
    )
    
    $
    16
 
 (a)
    
    Income before income taxes includes an interest expense allocation, net of
capitalized amounts, of $13 million in 2005 and $6 million in 2004. The allocation was
based on Pinnacle Wests weighted-average interest rate applied to the net property,
plant and equipment. 126




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MANAGEMENTS REPORT ON INTERNAL CONTROL
 OVER FINANCIAL REPORTING
 (ARIZONA PUBLIC SERVICE COMPANY)
 Internal Control  Integrated Framework Internal Control  Integrated Framework,
  127




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    128




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129




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ARIZONA PUBLIC SERVICE COMPANY
 
 STATEMENTS OF INCOME
 (dollars in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Electric Operating Revenues:Regulated electricity
    
    $
    2,244,951
    
    
    $
    2,051,602
    
    
    $
    1,999,390Marketing and trading
    
    
    25,842
    
    
    
    145,519
    
    
    
    105,541Total
    
    
    2,270,793
    
    
    
    2,197,121
    
    
    
    2,104,931Operating Expenses:Regulated electricity
fuel and purchased power
    
    
    656,654
    
    
    
    612,300
    
    
    
    606,251Marketing and trading
fuel and purchased power
    
    
    32,328
    
    
    
    150,954
    
    
    
    97,180Operations and maintenance
    
    
    591,941
    
    
    
    540,277
    
    
    
    513,604Depreciation and amortization
    
    
    325,174
    
    
    
    336,648
    
    
    
    389,240Income taxes (Notes 4 and S-2)
    
    
    157,273
    
    
    
    113,696
    
    
    
    91,646Other taxes
    
    
    125,810
    
    
    
    114,265
    
    
    
    108,852Total
    
    
    1,889,180
    
    
    
    1,868,140
    
    
    
    1,806,773Operating Income
    
    
    381,613
    
    
    
    328,981
    
    
    
    298,158Other Income (Deductions):Regulatory disallowance (Note 3)
    
    
    (138,562
    )
    
    
    
    
    
    
    Income taxes (Notes 4 and S-2)
    
    
    59,263
    
    
    
    (6,334
    )
    
    
    4,792Allowance for equity funds used
during construction
    
    
    11,191
    
    
    
    4,885
    
    
    
    14,240Other income (Note S-5)
    
    
    22,141
    
    
    
    30,593
    
    
    
    20,277Other expense (Note S-5)
    
    
    (23,204
    )
    
    
    (13,816
    )
    
    
    (12,962
    )Total
    
    
    (69,171
    )
    
    
    15,328
    
    
    
    26,347Interest Deductions:Interest on long-term debt
    
    
    138,476
    
    
    
    140,556
    
    
    
    142,706Interest on short-term borrowings
    
    
    7,026
    
    
    
    6,427
    
    
    
    4,904Debt discount, premium and expense
    
    
    4,085
    
    
    
    4,854
    
    
    
    3,337Allowance for borrowed funds used
during construction
    
    
    (7,624
    )
    
    
    (7,155
    )
    
    
    (7,379
    )Total
    
    
    141,963
    
    
    
    144,682
    
    
    
    143,568Net Income
    
    $
    170,479
    
    
    $
    199,627
    
    
    $
    180,937
  130




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ARIZONA PUBLIC SERVICE COMPANY
 
 BALANCE SHEETS
 (dollars in thousands)
 December 31,2005
    
    
    2004ASSETSUtility Plant (Notes 1, 6, 9 and 10)Electric plant in service and held for future use
    
    $
    10,682,999
    
    
    $
    9,120,407Less accumulated depreciation and amortization
    
    
    3,616,886
    
    
    
    3,266,181Total
    
    
    7,066,113
    
    
    
    5,854,226Construction work in progress
    
    
    314,584
    
    
    
    249,243Intangible assets, net of accumulated amortization of
$181,046 and $154,843
    
    
    90,327
    
    
    
    103,701Nuclear fuel, net of accumulated amortization of
$53,984 and $59,020
    
    
    54,184
    
    
    
    51,188Utility plant  net
    
    
    7,525,208
    
    
    
    6,258,358Investments and Other AssetsNote receivable from Pinnacle West Energy
(Notes 1, 3 and S-6)
    
    
    
    
    
    
    498,489Decommissioning trust accounts (Note 12)
    
    
    293,943
    
    
    
    267,700Assets from risk management and trading activities
(Note S-4)
    
    
    234,372
    
    
    
    20,123Other assets
    
    
    64,128
    
    
    
    61,364Total investments and other assets
    
    
    592,443
    
    
    
    847,676Current Assets:Cash and cash equivalents
    
    
    49,933
    
    
    
    49,575Investment in debt securities
    
    
    
    
    
    
    181,175Customer and other receivables
    
    
    421,621
    
    
    
    353,772Allowance for doubtful accounts
    
    
    (3,568
    )
    
    
    (3,444
    )Materials and supplies (at average cost)
    
    
    109,736
    
    
    
    83,893Fossil fuel (at average cost)
    
    
    23,658
    
    
    
    20,506Assets from risk management and trading activities
(Note S-4)
    
    
    532,923
    
    
    
    70,430Other
    
    
    14,639
    
    
    
    10,187Total current assets
    
    
    1,148,942
    
    
    
    766,094Deferred Debits:Deferred fuel and purchased power regulatory asset
(Notes 1, 3, 4 and S-2)
    
    
    172,756
    
    
    
    Other
regulatory assets (Notes 1, 3, 4 and S-2)
    
    
    151,123
    
    
    
    135,051Unamortized debt issue costs
    
    
    25,279
    
    
    
    21,832Other
    
    
    91,690
    
    
    
    69,541Total deferred debits
    
    
    440,848
    
    
    
    226,424Total Assets
    
    $
    9,707,441
    
    
    $
    8,098,552
  131




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ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)
 December 31,2005
    
    
    2004LIABILITIES AND EQUITYCapitalization:Common stock
    
    $
    178,162
    
    
    $
    178,162Additional paid-in capital (Note 3)
    
    
    1,853,098
    
    
    
    1,246,804Retained earnings
    
    
    860,675
    
    
    
    860,196Accumulated other comprehensive income (loss):Minimum pension liability adjustment
    
    
    (86,132
    )
    
    
    (71,087
    )Derivative instruments
    
    
    179,422
    
    
    
    18,327Common stock equity
    
    
    2,985,225
    
    
    
    2,232,402Long-term debt less current maturities (Note 6)
    
    
    2,479,703
    
    
    
    2,267,094Total capitalization
    
    
    5,464,928
    
    
    
    4,499,496Current Liabilities:Current maturities of long-term debt (Note 6)
    
    
    85,620
    
    
    
    451,247Accounts payable
    
    
    215,384
    
    
    
    215,076Accrued taxes
    
    
    360,737
    
    
    
    292,521Accrued interest
    
    
    25,003
    
    
    
    33,332Customer deposits
    
    
    55,474
    
    
    
    51,804Deferred income taxes (Notes 4 and S-2)
    
    
    64,210
    
    
    
    9,057Liabilities from risk management and trading
activities (Note S-4)
    
    
    480,138
    
    
    
    34,292Other
    
    
    227,398
    
    
    
    91,441Total current liabilities
    
    
    1,513,964
    
    
    
    1,178,770Deferred Credits and Other:Deferred income taxes (Notes 4 and S-2)
    
    
    1,215,403
    
    
    
    1,108,571Regulatory liabilities (Notes 1, 3, 4, and S-2)
    
    
    592,494
    
    
    
    506,646Liability for asset retirements (Note 12)
    
    
    269,011
    
    
    
    251,612Pension liability (Note 8)
    
    
    233,342
    
    
    
    203,668Customer advances for construction
    
    
    60,287
    
    
    
    59,185Unamortized gain  sale of utility plant (Note 9)
    
    
    45,757
    
    
    
    50,333Liabilities from risk management and trading
activities (Note S-4)
    
    
    83,774
    
    
    
    13,124Other
    
    
    228,481
    
    
    
    227,147Total deferred credits and other
    
    
    2,728,549
    
    
    
    2,420,286Commitments and Contingencies (Notes 3, 11, 12 and S-6)Total Liabilities and Equity
    
    $
    9,707,441
    
    
    $
    8,098,552
  132




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ARIZONA PUBLIC SERVICE COMPANY
 
 STATEMENTS OF CASH FLOWS
 (dollars in thousands)
 Year Ended December 31,2005
    
    
    2004 (a)
    
    
    2003 (a)Cash Flows from Operating Activities:Net income
    
    $
    170,479
    
    
    $
    199,627
    
    
    $
    180,937Adjustments to reconcile net income to net cash
provided by operating activities:Regulatory disallowance
    
    
    138,562
    
    
    
    
    
    
    
    Depreciation and amortization including nuclear fuel
    
    
    353,082
    
    
    
    367,094
    
    
    
    417,997Deferred fuel and purchased power
    
    
    (172,756
    )
    
    
    
    
    
    
    Allowance for equity funds used during
construction
    
    
    (11,191
    )
    
    
    (4,885
    )
    
    
    (14,240
    )Deferred income taxes
    
    
    9,659
    
    
    
    (140,855
    )
    
    
    (1,087
    )Change in derivative mark-to-market valuations
    
    
    3,492
    
    
    
    (15,807
    )
    
    
    2,339Changes in current assets and liabilities:Customer and other receivables
    
    
    (56,152
    )
    
    
    (24,146
    )
    
    
    85,106Materials, supplies and fossil fuel
    
    
    (12,268
    )
    
    
    4,643
    
    
    
    (872
    )Other current assets
    
    
    (2,592
    )
    
    
    (2,529
    )
    
    
    976Accounts payable
    
    
    (12,372
    )
    
    
    88,937
    
    
    
    17,961Accrued taxes
    
    
    67,454
    
    
    
    202,047
    
    
    
    7,917Collateral
    
    
    169,080
    
    
    
    5,671
    
    
    
    11,431Other current liabilities
    
    
    (37,781
    )
    
    
    22,715
    
    
    
    9,737Changes in risk management and trading  liabilities
    
    
    115,495
    
    
    
    8,879
    
    
    
    Change in other long-term assets
    
    
    (9,303
    )
    
    
    (44,386
    )
    
    
    (2,072
    )Change in other long-term liabilities
    
    
    9,002
    
    
    
    51,133
    
    
    
    60,994Net cash flow provided by operating activities
    
    
    721,890
    
    
    
    718,138
    
    
    
    777,124Cash Flows from Investing Activities:Capital expenditures
    
    
    (609,857
    )
    
    
    (513,677
    )
    
    
    (426,260
    )Transfer of PWEC Dedicated Assets to APS
    
    
    (500,000
    )
    
    
    
    
    
    
    Purchase of Sundance Plant
    
    
    (185,046
    )
    
    
    
    
    
    
    Allowance
for borrowed funds used during construction
    
    
    (7,624
    )
    
    
    (7,155
    )
    
    
    (7,379
    )Purchases of investment securities
    
    
    (1,476,623
    )
    
    
    (871,610
    )
    
    
    (855,660
    )Proceeds from sale of investment securities
    
    
    1,657,798
    
    
    
    760,285
    
    
    
    785,810Proceeds from nuclear decommissioning trust sales
    
    
    186,215
    
    
    
    123,795
    
    
    
    168,874Investment in nuclear decommissioning trust
    
    
    (204,633
    )
    
    
    (135,239
    )
    
    
    (180,319
    )Loan to Pinnacle West Energy
    
    
    
    
    
    
    
    
    
    
    (497,865
    )Repayment of loan by Pinnacle West Energy
    
    
    500,000
    
    
    
    
    
    
    
    Other
    
    
    (5,372
    )
    
    
    10,639
    
    
    
    3,149Net cash flow used for investing activities
    
    
    (645,142
    )
    
    
    (632,962
    )
    
    
    (1,009,650
    )Cash Flows from Financing Activities:Issuance of long-term debt
    
    
    411,787
    
    
    
    478,140
    
    
    
    491,654Equity infusion
    
    
    250,000
    
    
    
    
    
    
    
    Dividends paid on common stock
    
    
    (170,000
    )
    
    
    (170,000
    )
    
    
    (170,000
    )Repayment and reacquisition of long-term debt
    
    
    (568,177
    )
    
    
    (385,893
    )
    
    
    (89,525
    )Net cash flow provided by (used for) financing
activities
    
    
    (76,390
    )
    
    
    (77,753
    )
    
    
    232,129Net increase (decrease) in cash and cash equivalents
    
    
    358
    
    
    
    7,423
    
    
    
    (397
    )Cash and cash equivalents at beginning of year
    
    
    49,575
    
    
    
    42,152
    
    
    
    42,549Cash and cash equivalents at end of year
    
    $
    49,933
    
    
    $
    49,575
    
    
    $
    42,152Supplemental disclosure of cash flow information:Cash paid during the year for:Income taxes, net of refunds
    
    $
    34,252
    
    
    $
    68,074
    
    
    $
    74,523Interest, net of amounts capitalized
    
    $
    146,207
    
    
    $
    149,148
    
    
    $
    140,010
  
 (a)
    
    See Cash and Cash Equivalents in Note 1 for information regarding reclassifications of prior
year amounts. 133




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ARIZONA PUBLIC SERVICE COMPANY
 
 STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
 (dollars in thousands)
 Years Ended December 31,2005
    
    
    2004
    
    
    2003COMMON STOCK
    
    $
    178,162
    
    
    $
    178,162
    
    
    $
    178,162ADDITIONAL PAID-IN CAPITAL
    
    
    1,853,098
    
    
    
    1,246,804
    
    
    
    1,246,804RETAINED EARNINGSBalance at beginning of year
    
    
    860,196
    
    
    
    830,569
    
    
    
    819,632Net income
    
    
    170,479
    
    
    
    199,627
    
    
    
    180,937Common stock dividends
    
    
    (170,000
    )
    
    
    (170,000
    )
    
    
    (170,000
    )Balance at end of year
    
    
    860,675
    
    
    
    860,196
    
    
    
    830,569ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)Balance at beginning of year
    
    
    (52,760
    )
    
    
    (51,905
    )
    
    
    (85,286
    )Minimum pension liability adjustment, net of
tax expense (benefit) of ($9,023),
($8,936) and $3,105
    
    
    (15,045
    )
    
    
    (13,929
    )
    
    
    4,329Unrealized gain on derivative instruments,
net of tax expense of $140,135,
$16,824 and $15,824
    
    
    218,656
    
    
    
    25,892
    
    
    
    24,135Reclassification of realized (gain) loss to
income, net of tax expense (benefit) of
($37,082), ($8,344) and $3,207
    
    
    (57,561
    )
    
    
    (12,818
    )
    
    
    4,917Balance at end of year
    
    
    93,290
    
    
    
    (52,760
    )
    
    
    (51,905
    )TOTAL COMMON STOCK EQUITY
    
    $
    2,985,225
    
    
    $
    2,232,402
    
    
    $
    2,203,630COMPREHENSIVE INCOMENet income
    
    $
    170,479
    
    
    $
    199,627
    
    
    $
    180,937Other comprehensive income (loss)
    
    
    146,050
    
    
    
    (855
    )
    
    
    33,381Total comprehensive income
    
    $
    316,529
    
    
    $
    198,772
    
    
    $
    214,318
  134




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##### Table of Contents



APSConsolidated
    
    SupplementalFootnote
    
    FootnoteReference
    
    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
    
    Common Stock and Treasury Stock
    
    Note 7
    
    Retirement Plans and Other Benefits
    
    Note 8
    
    Leases
    
    Note 9
    
    Jointly-Owned Facilities
    
    Note 10
    
    Commitments and Contingencies
    
    Note 11
    
    Asset Retirement Obligations
    
    Note 12
    
    Selected Quarterly Financial Data (Unaudited)
    
    Note 13
    
    Note S-3Fair Value of Financial Instruments
    
    Note 14
    
    Earnings Per Share
    
    Note 15
    
    Stock-Based Compensation
    
    Note 16
    
    Business Segments
    
    Note 17
    
    Derivative and Energy Trading Activities
    
    Note 18
    
    Note S-4Other Income and Other Expense
    
    Note 19
    
    Note S-5Variable Interest Entities
    
    Note 20
    
    Guarantees
    
    Note 21
    
    Discontinued Operations
    
    Note 22
    
    Related Party Transactions
    
    
    
    Note S-6
 135




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##### Table of Contents



S-1. Summary of Significant Accounting Polices
 Stock-Based Compensation
   2005
    
    
    2004
    
    
    2003Net income, as reported
    
    $
    170,479
    
    
    $
    199,627
    
    
    $
    180,937Add: Stock compensation
expense included in reported
net income (net of tax)
    
    
    3,102
    
    
    
    3,353
    
    
    
    2,035Deduct: Total stock
compensation expense
determined under fair
value method (net of tax)
    
    
    (3,102
    )
    
    
    (3,713
    )
    
    
    (3,024
    )Pro forma net income
    
    $
    170,479
    
    
    $
    199,267
    
    
    $
    179,948
 S-2. Income Taxes
     136




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    79,917
    
    
    $
    207,306
    
    
    $
    75,087State
    
    
    8,434
    
    
    
    53,579
    
    
    
    12,854Total current
    
    
    88,351
    
    
    
    260,885
    
    
    
    87,941Deferred
    
    
    9,659
    
    
    
    (140,855
    )
    
    
    (1,087
    )Total income tax expense
    
    $
    98,010
    
    
    $
    120,030
    
    
    $
    86,854
   Year Ended December 31,2005
    
    
    2004
    
    
    2003Federal income tax expense at 35%
statutory rate
    
    $
    93,971
    
    
    $
    111,880
    
    
    $
    93,727Increases (reductions) in tax expense
resulting from:State income tax net of federal income
tax benefit
    
    
    8,986
    
    
    
    12,496
    
    
    
    9,723Credits and favorable adjustments related
to prior years resolved in current year
    
    
    
    
    
    
    (315
    )
    
    
    (12,944
    )Medicare Subsidy Part-D (see Note 8)
    
    
    (2,465
    )
    
    
    (1,507
    )
    
    
    Allowance for equity funds used during
construction (see Note 1)
    
    
    (3,694
    )
    
    
    (1,543
    )
    
    
    (4,984
    )Other
    
    
    1,212
    
    
    
    (981
    )
    
    
    1,332Income tax expense
    
    $
    98,010
    
    
    $
    120,030
    
    
    $
    86,854
 137




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##### Table of Contents



December 31,2005
    
    
    2004Current liability
    
    $
    (64,210
    )
    
    $
    (9,057
    )Long term liability
    
    
    (1,215,403
    )
    
    
    (1,108,571
    )Accumulated deferred income taxes  net
    
    $
    (1,279,613
    )
    
    $
    (1,117,628
    )
  December 31,2005
    
    
    2004DEFERRED TAX ASSETSRegulatory liabilities:Asset retirement obligation
    
    $
    189,726
    
    
    $
    182,086Federal excess deferred income tax
    
    
    14,446
    
    
    
    16,341Deferred fuel and purchased power
 mark-to-market
    
    
    11,923
    
    
    
    Other
    
    
    29,720
    
    
    
    8,282Risk management and trading activities
    
    
    171,640
    
    
    
    15,172Pension liability
    
    
    72,376
    
    
    
    80,184Deferred gain on Palo Verde Unit 2
sale-leaseback
    
    
    17,868
    
    
    
    19,816Other
    
    
    71,567
    
    
    
    73,925Total deferred tax assets
    
    
    579,266
    
    
    
    395,806DEFERRED TAX LIABILITIESPlant-related
    
    
    (1,426,158
    )
    
    
    (1,424,859
    )Risk management and trading activities
    
    
    (301,709
    )
    
    
    (33,808
    )Regulatory assets:Deferred fuel and purchased power
    
    
    (67,461
    )
    
    
    Other
    
    
    (63,551
    )
    
    
    (54,767
    )Total deferred tax liabilities
    
    
    (1,858,879
    )
    
    
    (1,513,434
    )Accumulated deferred income taxes  net
    
    $
    (1,279,613
    )
    
    $
    (1,117,628
    )
 138




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##### Table of Contents



S-3. Selected Quarterly Financial Data (Unaudited)
  2005 Quarter Ended,
    
    2005March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalOperating revenues
    
    $
    441,292
    
    
    $
    588,757
    
    
    $
    748,348
    
    
    $
    492,396
    
    
    $
    2,270,793Operations and maintenance
    
    
    142,294
    
    
    
    138,314
    
    
    
    149,198
    
    
    
    162,135
    
    
    
    591,941Operating income
    
    
    58,743
    
    
    
    95,321
    
    
    
    174,415
    
    
    
    53,134
    
    
    
    381,613Net income
    
    
    27,045
    
    
    
    63,998
    
    
    
    61,093
    
    
    
    18,343
    
    
    
    170,479
 2004 Quarter Ended,
    
    2004March 31,
    
    June 30,
    
    September 30,
    
    December 31,
    
    TotalOperating 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
 S-4. Derivative and Energy Trading Accounting
  Cash Flow Hedges
  2005
    
    2004
    
    2003Gains (losses) on the ineffective
portion of
derivatives qualifying for hedge
accounting
    
    $
    14,452
    
    
    $
    (1,570
    )
    
    $
    7,033Gains from the change in options
time value excluded from measurement
of effectiveness
    
    
    620
    
    
    
    185
    
    
    
    181Gains from the discontinuance of
cash flow hedges
    
    
    473
    
    
    
    575
    
    
    
    
  139




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##### Table of Contents




    
    Regulated Electricity  non-trading derivative instruments that hedge APS purchases
and sales of electricity and fuel for its Native Load requirements; and
    
    Marketing and Trading  both non-trading and trading derivative instruments.
   Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetAssets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Regulated Electricity:Mark-to-market
    
    $
    516,399
    
    
    $
    228,873
    
    
    $
    (335,801
    )
    
    $
    (74,787
    )
    
    $
    334,684Margin account
and options
    
    
    1,814
    
    
    
    
    
    
    
    (124,165
    )
    
    
    
    
    
    
    (122,351
    )Marketing & Trading:Mark-to-market
    
    
    13,027
    
    
    
    5,499
    
    
    
    (20,172
    )
    
    
    (8,778
    )
    
    
    (10,424
    )Options at cost
    
    
    1,683
    
    
    
    
    
    
    
    
    
    
    
    (209
    )
    
    
    1,474Total
    
    $
    532,923
    
    
    $
    234,372
    
    
    $
    (480,138
    )
    
    $
    (83,774
    )
    
    $
    203,383
  Investments
    
    
    
    
    
    
    DeferredCurrent
    
    
    and Other
    
    
    Current
    
    
    Credits and
    
    
    Net AssetAssets
    
    
    Assets
    
    
    Liabilities
    
    
    Other
    
    
    (Liability)Regulated Electricity:Mark-to-market
    
    $
    45,220
    
    
    $
    19,417
    
    
    $
    (19,191
    )
    
    $
    (12,000
    )
    
    $
    33,446Margin account
and options
    
    
    18,821
    
    
    
    118
    
    
    
    (8,879
    )
    
    
    
    
    
    
    10,060Marketing & Trading:Mark-to-market
    
    
    6,389
    
    
    
    581
    
    
    
    (6,222
    )
    
    
    (1,124
    )
    
    
    (376
    )Options at cost
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Total
    
    $
    70,430
    
    
    $
    20,123
    
    
    $
    (34,292
    )
    
    $
    (13,124
    )
    
    $
    43,137
  140




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##### Table of Contents



S-5. Other Income and Other Expense
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Other income:Interest income
    
    $
    14,513
    
    
    $
    22,354
    
    
    $
    15,660Miscellaneous
    
    
    2,736
    
    
    
    2,021
    
    
    
    1,892Investment gains  net
    
    
    1,705
    
    
    
    3,192
    
    
    
    2,107Asset dispositions
    
    
    3,187
    
    
    
    3,026
    
    
    
    618Total other income
    
    $
    22,141
    
    
    $
    30,593
    
    
    $
    20,277Other expense:Non-operating costs (a)
    
    $
    (11,706
    )
    
    $
    (8,923
    )
    
    $
    (9,361
    )Asset dispositions
    
    
    (9,759
    )
    
    
    (1,212
    )
    
    
    (1,522
    )Miscellaneous
    
    
    (1,739
    )
    
    
    (3,681
    )
    
    
    (2,079
    )Total other expense
    
    $
    (23,204
    )
    
    $
    (13,816
    )
    
    $
    (12,962
    )
 
 (a)
    
    As defined by the FERC, includes below-the-line non-operating utility costs
(primarily community relations and other costs excluded from utility rate recovery). 141




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##### Table of Contents



S-6. Related Party Transactions
  Year Ended December 31,2005
    
    
    2004
    
    
    2003Electric operating revenues:Pinnacle West  marketing and trading
    
    $
    6
    
    
    $
    13
    
    
    $
    12Pinnacle West Energy
    
    
    2
    
    
    
    3
    
    
    
    9Total
    
    $
    8
    
    
    $
    16
    
    
    $
    21Fuel and purchased power costs:Pinnacle West Energy
    
    $
    61
    
    
    $
    75
    
    
    $
    70Capital expenditures:Pinnacle
West  marketing and trading
    
    $
    
    
    
    $
    11
    
    
    $
    Pinnacle West
    
    
    
    
    
    
    22
    
    
    
    Total
    
    $
    
    
    
    $
    33
    
    
    $
    Other:Pinnacle West Energy:Lease expense
    
    $
    
    
    
    $
    
    
    
    $
    10Interest income
    
    $
    7
    
    
    $
    19
    
    
    $
    12Pinnacle West:Equity infusion from Pinnacle West
(see Note 3)
    
    $
    250
    
    
    $
    
    
    
    $
    
 As of December 31,2005
    
    
    2004Net intercompany receivables (payables):Pinnacle West Energy
    
    $
    
    
    
    $
    467Pinnacle West  marketing and trading
    
    
    82
    
    
    
    19APS Energy Services
    
    
    2
    
    
    
    9Pinnacle West
    
    
    (2
    )
    
    
    (5
    )Total
    
    $
    82
    
    
    $
    490
  142




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143




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PINNACLE WEST CAPITAL CORPORATION
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
  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:2005
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    1,661
    
    
    
    
    
    
    
    
    
    
    
    1,661
    (a)
    
    
    Reserve for uncollectibles:2005
    
    $
    4,896
    
    
    $
    2,638
    
    
    $
    
    
    
    $
    2,555
    
    
    $
    4,9792004
    
    
    9,223
    
    
    
    2,868
    
    
    
    
    
    
    
    7,195
    
    
    
    4,8962003
    
    
    9,607
    
    
    
    3,715
    
    
    
    
    
    
    
    4,099
    
    
    
    9,223Reserve for contract losses:2005
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    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). 144




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ARIZONA PUBLIC SERVICE COMPANY
 
 SCHEDULE II  RESERVE FOR UNCOLLECTIBLES
  Column A
    
    Column B
    
    Column C
    
    Column D
    
    Column EAdditionsBalance at
    
    Charged to
    
    Charged
    
    
    
    
    
    Balancebeginning
    
    cost and
    
    to other
    
    
    
    
    
    at end ofDescription
    
    of period
    
    expenses
    
    accounts
    
    Deductions
    
    periodReserve for uncollectibles:2005
    
    $
    3,444
    
    
    $
    2,638
    
    
    $
    
    
    
    $
    2,514
    
    
    $
    3,5682004
    
    
    3,743
    
    
    
    2,446
    
    
    
    
    
    
    
    2,745
    
    
    
    3,4442003
    
    
    1,341
    
    
    
    5,716
    
    
    
    
    
    
    
    3,314
    
    
    
    3,743
 145




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  et seq
         146




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##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF PINNACLE WEST
   
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 Security Ownership of Certain Beneficial Owners and Management
  147




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Securities Authorized For Issuance Under Equity Compensation Plans
  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 inand rights
    
    
    and rights
    
    
    column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved
by security
holders
    
    
    1,695,772
    
    
    $
    39.65
    
    
    
    4,245,671Equity compensation
plans not
approved by
security
holders
    
    
    
    
    
    
    
    
    
    
    145,100Total
    
    
    1,695,772
    
    
    $
    39.65
    
    
    
    4,390,771
 Equity Compensation Plans Approved By Security Holders
  Equity Compensation Plans Not Approved By Security Holders
  Number of Shares Subject to the 2000 Plan
 Eligibility for Participation
 148




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##### Table of Contents



Terms of Awards
 Annual Grants of Stock
  Discretionary Grants of Stock
  Grants of Non-qualified Stock Options
  149




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
 Pinnacle West
  APS
  Type of Service
    
    2004
    
    
    2005Audit Fees (1)
    
    $
    1,910,089
    
    
    $
    2,167,319Audit-Related Fees (2)
    
    
    318,750
    
    
    
    33,899Tax Fees (3)
    
    
    1,559,928
    
    
    
    1,025
 
 (1)
    
    The aggregate fees billed for services rendered for the audit of annual financial statements
and for review of financial statements included in Forms 10-Q.(2)
    
    The aggregate fees billed for assurance services that are reasonably related to the
performance of the audit or review of the financial statements that are not included in Audit
Fees reported above, which primarily consist of fees for Sarbanes-Oxley Section 404 readiness.(3)
    
    The aggregate fees billed primarily for investment tax credit services, tax compliance and
tax planning.  150




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 Financial Statements and Financial Statement Schedules
  Exhibits Filed
  Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    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 December 14,
2005
    
    3.1 to Pinnacle West/APS December 9,
2005 Form 8-K Report
    
    12-15-053.3
    
    APS
    
    Articles of
Incorporation,
restated as of May
25, 1988
    
    4.2 to APS Form S-3 Registration Nos.
33-33910 and 33-55248 by means of
September 24, 1993 Form 8-K Report, File
No. 1-4473
    
    9-29-933.4
    
    APS
    
    Arizona Public
Service Company
Bylaws, amended as
of June 23, 2004
    
    3.1 to APS June 30, 2004 Form 10-Q
Report, File No. 1-4473
    
    8-9-044.12
    
    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
 151




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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 West
APS
    
    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
    
    4-9-97
 152




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective4.18
    
    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
    
    12-21-004.20
    
    Pinnacle West
    
    First Supplemental
Indenture dated as
of March 15, 2001
    
    4.1 to Pinnacle Wests Registration
Statement No. 333-52476 by means of March 26, 2001
Form 8-K Report, File No. 1-8962
    
    3-26-014.21
    
    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
    
    12-21-004.23
    
    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
    
    3-30-88
 153




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective4.25
    
    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
    
    1-16-984.27
    
    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
    
    2-28-02
 154




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective4.32
    
    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
    
    6-28-044.34
    
    Pinnacle West
APS
    
    Ninth Supplemental
Indenture dated as
of August 15, 2005
    
    4.1 to APS Registration Statements Nos.
333-106772 and 333-121512 by means of
August 17, 2005 Form 8-K Report, File
No. 1-4473
    
    8-22-054.35
    
    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
    
    4-19-994.36
    
    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
    
    5-15-02
 155




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective4.37
    
    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
    
    8-9-0410.1
    
    Pinnacle West
APS
    
    Amendment No. 4 to
the Decommissioning
Trust Agreement
(PVNGS Unit 1),
dated as of
December 19, 2003
    
    10.3 to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.2
    
    Pinnacle West
APS
    
    Amendment No. 7 to
the Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of
December 19, 2003
    
    10.4 to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.3
    
    Pinnacle West
APS
    
    Amendment No. 4 to
the Decommissioning
Trust Agreement
(PVNGS Unit 3),
dated as of
December 19, 2003
    
    10.5 to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.4
    
    Pinnacle West
APS
    
    Fourth Amendment to
the Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan
    
    10.6 to Pinnacle Wests 2003 Form 10-K
Report, File No. 1-8962
    
    3-15-0410.5
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
Supplement Excess
Benefit Retirement
Plan, amended and
restated as of
January 1, 2003
    
    10.7 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
    
    Effective10.6
    
    Pinnacle West
APS
    
    Two separate
Decommissioning
Trust Agreements
(relating to PVNGS
Units 1 and 3,
respectively), each
dated July 1, 1991,
between APS and
Mellon Bank, N.A.,
as Decommissioning
Trustee
    
    10.2 to APS September 1991 Form 10-Q
Report, File No. 1-4473
    
    11-14-9110.7
    
    Pinnacle West
APS
    
    Amendment No. 1 to
Decommissioning
Trust Agreement
(PVNGS Unit 1),
dated as of
December 1, 1994
    
    10.1 to APS 1994 Form
10- K Report, File No. 1-4473
    
    3-30-9510.8
    
    Pinnacle West
APS
    
    Amendment No. 1 to
Decommissioning
Trust Agreement
(PVNGS Unit 3),
dated as of
December 1, 1994
    
    10.2 to APS 1994 Form
10-K Report, File No. 1-4473
    
    3-30-9510.9
    
    Pinnacle West
APS
    
    Amendment No. 2 to
APS Decommissioning
Trust Agreement
(PVNGS Unit 1)
dated as of July 1,
1991
    
    10.4 to APS 1996 Form
10-K Report , File No. 1-4473
    
    3-28-9710.10
    
    Pinnacle West
APS
    
    Amendment No. 2 to
APS Decommissioning
Trust Agreement
(PVNGS Unit 3)
dated as of July 1,
1991
    
    10.6 to APS 1996 Form
10-K Report, File No. 1-4473
    
    3-28-97
 157




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.11
    
    Pinnacle West
APS
    
    Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2)
dated as of January
31, 1992, among
APS, Mellon Bank,
N.A., as
Decommissioning
Trustee, and State
Street Bank and
Trust Company, as
successor to The
First National
Bank of Boston, as
Owner Trustee under
two separate Trust
Agreements, each
with a separate
Equity Participant,
and as Lessor under
two separate
Facility Leases,
each relating to an
undivided interest
in PVNGS Unit 2
    
    10.1 to Pinnacle Wests 1991 Form 10-K
Report, File No. 1-8962
    
    3-26-9210.12
    
    Pinnacle West
APS
    
    First Amendment to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of
November 1, 1992
    
    10.2 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9310.13
    
    Pinnacle West
APS
    
    Amendment No. 2 to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of
November 1, 1994
    
    10.3 to APS 1994 Form
10-K Report, File No. 1-4473
    
    3-30-9510.14
    
    Pinnacle West
APS
    
    Amendment No. 3 to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of January
31, 1992
    
    10.1 to APS June 1996 Form 10-Q Report,
File No. 1-4473
    
    8-9-96
 158




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.15
    
    Pinnacle West
APS
    
    Amendment No. 4 to
Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2)
dated as of January
31, 1992
    
    APS 10.5 to APS 1996 Form 10-K Report,
File No. 1-4473
    
    3-28-9710.16
    
    Pinnacle West
APS
    
    Amendment No. 5 to
the Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of June
30, 2000
    
    10.1 to Pinnacle Wests March 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-0210.17
    
    Pinnacle West
APS
    
    Amendment No. 3 to
the Decommissioning
Trust Agreement
(PVNGS Unit 1),
dated as of March
18, 2002
    
    10.2 to Pinnacle Wests March 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-0210.18
    
    Pinnacle West
APS
    
    Amendment No. 6 to
the Amended and
Restated
Decommissioning
Trust Agreement
(PVNGS Unit 2),
dated as of March
18, 2002
    
    10.3 to Pinnacle Wests March 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-0210.19
    
    Pinnacle West
APS
    
    Amendment No. 3 to
the Decommissioning
Trust Agreement
(PVNGS Unit 3),
dated as of March
18, 2002
    
    10.4 to Pinnacle Wests March 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-0210.20
    
    Pinnacle West
APS
    
    Asset Purchase and
Power Exchange
Agreement dated
September 21, 1990
between APS and
PacifiCorp, as
amended as of
October 11, 1990
and as of July 18,
1991
    
    10.1 to APS June 1991 Form 10-Q Report,
File No. 1-4473
    
    8-8-91
 159




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.21
    
    Pinnacle West
APS
    
    Long-Term Power
Transaction
Agreement dated
September 21, 1990
between APS and
PacifiCorp, as
amended as of
October 11, 1990,
and as of July 8,
1991
    
    10.2 to APS June 1991 Form 10-Q Report,
File No. 1-4473
    
    8-8-9110.22
    
    Pinnacle West
APS
    
    Amendment No. 1
dated April 5, 1995
to the Long-Term
Power Transaction
Agreement and Asset
Purchase and Power
Exchange Agreement
between PacifiCorp
and APS
    
    10.3 to APS 1995 Form
10-K Report, File No. 1-4473
    
    3-29-9610.23
    
    Pinnacle West
APS
    
    Restated
Transmission
Agreement between
PacifiCorp and APS
dated April 5, 1995
    
    10.4 to APS 1995 Form
10-K Report, File No. 1-4473
    
    3-29-9610.24
    
    Pinnacle West
APS
    
    Contract among
PacifiCorp, APS and
United States
Department of
Energy Western Area
Power
Administration,
Salt Lake Area
Integrated Projects
for Firm
Transmission
Service dated May
5, 1995
    
    10.5 to APS 1995 Form
10-K Report, File No. 1-4473
    
    3-29-9610.25
    
    Pinnacle West
APS
    
    Reciprocal
Transmission
Service Agreement
between APS and
PacifiCorp dated as
of March 2, 1994
    
    10.6 to APS 1995 Form
10-K Report, File No. 1-4473
    
    3-29-96
 160




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.26
    
    Pinnacle West
APS
    
    Contract, dated
July 21, 1984, with
DOE providing for
the disposal of
nuclear fuel and/or
high -level
radioactive waste,
ANPP
    
    10.31 to Pinnacle Wests Form S-14
Registration Statement, File No. 2-96386
    
    3-13-8510.27
    
    Pinnacle West
APS
    
    Indenture of Lease
with Navajo Tribe
of Indians, Four
Corners Plant
    
    5.01 to APS Form S-7 Registration
Statement, File No. 2-59644
    
    9-1-7710.28
    
    Pinnacle West
APS
    
    Supplemental and
Additional
Indenture of Lease,
including
amendments and
supplements to
original lease with
Navajo Tribe of
Indians, Four
Corners Plant
    
    5.02 to APS Form S-7 Registration
Statement, File No. 2-59644
    
    9-1-7710.29
    
    Pinnacle West
APS
    
    Amendment and
Supplement No. 1 to
Supplemental and
Additional
Indenture of Lease
Four Corners, dated
April 25, 1985
    
    10.36 to Pinnacle Wests Registration
Statement on Form 8-B Report, File No.
1-8962
    
    7-25-8510.30
    
    Pinnacle West
APS
    
    Application and
Grant of
multi-party
rights-of-way and
easements, Four
Corners Plant Site
    
    5.04 to APS Form S-7 Registration
Statement, File No. 2-59644
    
    9-1-7710.31
    
    Pinnacle West
APS
    
    Application and
Amendment No. 1 to
Grant of
multi-party
rights-of-way and
easements, Four
Corners Power Plant
Site dated April
25, 1985
    
    10.37 to Pinnacle Wests Registration
Statement on Form 8-B, File No. 1-8962
    
    7-25-85
 161




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.32
    
    Pinnacle West
APS
    
    Application and
Grant of Arizona
Public Service
Company rights-
of-way and
easements, Four
Corners Plant Site
    
    5.05 to APS Form S-7 Registration
Statement, File No. 2-59644
    
    9-1-7710.33
    
    Pinnacle West
APS
    
    Four Corners
Project Co-Tenancy
Agreement Amendment
No. 6
    
    10.7 to Pinnacle Wests 2000 Form 10-K
Report, File No. 1-8962
    
    3-14-0110.34
    
    Pinnacle West
APS
    
    Application and
Amendment No. 1 to
Grant of Arizona
Public Service
Company
rights-of-way and
easements, Four
Corners Power Plant
Site dated April
25, 1985
    
    10.38 to Pinnacle Wests Registration
Statement on Form 8-B, File No. 1-8962
    
    7-25-8510.35
    
    Pinnacle West
APS
    
    Indenture of Lease,
Navajo Units 1, 2,
and 3
    
    5(g) to APS Form S-7 Registration
Statement, File No. 2-36505
    
    3-23-7010.36
    
    Pinnacle West
APS
    
    Application of
Grant of
rights-of-way and
easements, Navajo
Plant
    
    5(h) to APS Form S-7 Registration
Statement, File No. 2-36505
    
    3-23-7010.37
    
    Pinnacle West
APS
    
    Water Service
Contract Assignment
with the United
States Department
of Interior, Bureau
of Reclamation,
Navajo Plant
    
    5(l) to APS Form S-7 Registration
Statement, File No. 2-394442
    
    3-16-71
 162




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.38
    
    Pinnacle West
APS
    
    Arizona Nuclear
Power Project
Participation
Agreement, dated
August 23, 1973,
among APS Salt
River Project
Agricultural
Improvement and
Power District,
Southern California
Edison Company,
Public Service
Company of New
Mexico, El Paso
Electric Company,
Southern California
Public Power
Authority, and
Department of Water
and Power of the
City of Los
Angeles, and
amendments 1-12
thereto
    
    10. 1 to APS 1988 Form
10-K Report, File No. 1-4473
    
    3-8-8910.39
    
    Pinnacle West
APS
    
    Amendment No. 13,
dated as of April
22, 1991, to
Arizona Nuclear
Power Project
Participation
Agreement, dated
August 23, 1973,
among APS, Salt
River Project
Agricultural
Improvement and
Power District,
Southern California
Edison Company,
Public Service
Company of New
Mexico, El Paso
Electric Company,
Southern California
Public Power
Authority, and
Department of Water
and Power of the
City of Los Angeles
    
    10.1 to APS March 1991 Form 10-Q
Report, File No. 1-4473
    
    5-15-91
 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. 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
    
    8-14-0010.41c
    
    Pinnacle West
APS
    
    Facility Lease,
dated as of August
1, 1986, between
State Street Bank
and Trust Company,
as successor to The
First National Bank
of Boston, in its
capacity as Owner
Trustee, as Lessor,
and APS, as Lessee
    
    4.3 to APS Form S-3 Registration
Statement, File No. 33-9480
    
    10-24-8610.42c
    
    Pinnacle West
APS
    
    Amendment No. 1,
dated as of
November 1, 1986,
to Facility Lease,
dated as of August
1, 1986, between
State Street Bank
and Trust Company,
as successor to The
First National Bank
of Boston, in its
capacity as Owner
Trustee, as Lessor,
and APS, as Lessee
    
    10.5 to APS September 1986 Form 10-Q
Report by means of Amendment No. 1 on
December 3, 1986 Form 8, File No. 1-4473
    
    12-4-86
 164




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.43c
    
    Pinnacle West
APS
    
    Amendment No. 2
dated as of June 1,
1987 to Facility
Lease dated as of
August 1, 1986
between State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as
Lessor, and APS, as
Lessee
    
    10.3 to APS 1988 Form
10-K Report, File No. 1-4473
    
    3-8-8910.44c
    
    Pinnacle West
APS
    
    Amendment No. 3,
dated as of March
17, 1993, to
Facility Lease,
dated as of August
1, 1986, between
State Street Bank
and Trust Company,
as successor to The
First National Bank
of Boston, as
Lessor, and APS, as
Lessee
    
    10.3 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9310.45
    
    Pinnacle West
APS
    
    Facility Lease,
dated as of
December 15, 1986,
between State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, in its
capacity as Owner
Trustee, as Lessor,
and APS, as Lessee
    
    10.1 to APS November 18, 1986 Form 8-K
Report, File No. 1-4473
    
    1-20-87
 165




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.46
    
    Pinnacle West
APS
    
    Amendment No. 1,
dated as of August
1, 1987, to
Facility Lease,
dated as of
December 15, 1986,
between State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as
Lessor, and APS, as
Lessee
    
    4.13 to APS Form S-3 Registration
Statement No. 33-9480 by means of
August 1, 1987 Form 8-K Report, File No.
1-4473
    
    8-24-8710.47
    
    Pinnacle West
APS
    
    Amendment No. 2,
dated as of March
17, 1993, to
Facility Lease,
dated as of
December 15, 1986,
between State
Street Bank and
Trust Company, as
successor to The
First National Bank
of Boston, as
Lessor, and APS, as
Lessee
    
    10.4 to APS 1992 Form
10-K Report, File No. 1-4473
    
    3-30-9310.48b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
Supplemental Excess
Benefit Retirement
Plan, as amended
and restated, dated
December 18, 2003
 166




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.49b
    
    Pinnacle West
APS
    
    Trust for the
Pinnacle West
Capital
Corporation,
Arizona Public
Service Company and
SunCor Development
Company Deferred
Compensation Plans
dated August 1,
1996
    
    10.14 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.50b
    
    Pinnacle West
APS
    
    First Amendment
dated December 7,
1999 to the Trust
for the Pinnacle
West Capital
Corporation,
Arizona Public
Service Company and
SunCor Development
Company Deferred
Compensation Plans
    
    10.15 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.51b
    
    Pinnacle West
APS
    
    Directors Deferred
Compensation Plan,
as restated,
effective January
1, 1986
    
    10.1 to APS June 1986 Form 10-Q Report,
File No. 1-4473
    
    8-13-8610.52b
    
    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
    
    3-30-9410.53b
    
    Pinnacle West
APS
    
    Third Amendment to
the Arizona Public
Service Company
Directors Deferred
Compensation Plan,
effective as of May
1, 1993
    
    10.1 to APS September 1994 Form 10-Q
Report, File No. 1-4473
    
    11-10-94
 167




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.54b
    
    Pinnacle West
APS
    
    Fourth Amendment
to the Arizona
Public Service
Company Directors
Deferred
Compensation Plan effective as of January 1, 1999
    
    10.8 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.55b
    
    Pinnacle West
APS
    
    Arizona Public
Service Company
Deferred
Compensation Plan,
as restated,
effective January
1, 1984, and the
second and third
amendments thereto,
dated December 22,
1986, and December
23, 1987
respectively
    
    10.4 to APS 1988 Form
10-K Report, File No. 1-4473
    
    3-8-8910.56b
    
    Pinnacle West
APS
    
    Third Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan,
effective as of
January 1, 1993
    
    10.3 to APS 1993 Form
10-K Report, File No. 1-4473
    
    3-30-9410.57b
    
    Pinnacle West
APS
    
    Fourth Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan
effective as of May
1, 1993
    
    10.2 to APS September 1994 Form 10-Q
Report, File No. 1-4473
    
    11-10-9410.58b
    
    Pinnacle West
APS
    
    Fifth Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan effective January 1, 1997
    
    10.3 to APS 1996 Form 10-K Report, File
No. 1-4473
    
    3-28-9710.59b
    
    Pinnacle West
APS
    
    Sixth Amendment to
the Arizona Public
Service Company
Deferred
Compensation Plan effective January 1, 2001
    
    10.8 to Pinnacle Wests 2000 Form 10-K
Report, File No. 1-8962
    
    3-14-0110.60b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan
as amended and
restated effective
January 1, 1996
    
    10.10 to APS 1995 Form 10-K Report,
File No. 1-4473
    
    3-29-96
 168




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.61b
    
    Pinnacle West
APS
    
    First Amendment
effective as of
January 1, 1999, to
the Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan
    
    10.7 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.62b
    
    Pinnacle West
APS
    
    Second Amendment
effective January
1, 2000 to the
Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan
    
    10.10 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.63b
    
    Pinnacle West
APS
    
    Third Amendment to
the Pinnacle West
Capital
Corporation,
Arizona Public
Service Company,
SunCor Development
Company and El
Dorado Investment
Company Deferred
Compensation Plan
    
    10.3 to Pinnacle Wests March 2003 Form
10-Q Report, File No. 1-8962
    
    5-15-0310.64b
    
    Pinnacle West
APS
    
    Fourth Amendment to the Pinnacle
West Capital Corporation, Arizona Public Service Company, SunCor
Development Company and El Dorado Investment Company Deferred
Compensation Plan, effective January 1, 2003.10.65b
    
    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
    
    3-31-03
 169




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.66b
    
    Pinnacle WestAPS
    
    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
    
    3-30-0010.67b
    
    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
    
    3-30-9610.68b
    
    Pinnacle West
APS
    
    Letter Agreement
dated August 16,
1996 between APS
and William L.
Stewart
    
    10.8 to APS 1996 Form
10-K Report, File No. 1-4473
    
    3-28-97
 170




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.69b
    
    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
    
    11-12-9710.70b
    
    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
    
    3-30-0010.71b
    
    Pinnacle West
APS
    
    Amendment to Letter
Agreement,
effective as of
January 1, 2002,
between APS and
William L. Stewart
    
    10.1 to Pinnacle Wests June 2002 Form
10-Q Report, File No. 1-8962
    
    8-13-0210.72b
    
    Pinnacle West
APS
    
    Letter Agreement
dated October 3,
1997 between
Arizona Public
Service Company and
James M. Levine
    
    10.17 to Pinnacle Wests 1999 Form 10-K
Report, File No. 1-8962
    
    3-30-0010.73b
    
    Pinnacle West
APS
    
    Employment
Agreement dated
February 27, 2003
between APS and
James M. Levine
    
    10.1 to Pinnacle Wests March 2003 Form
10-Q Report, File No. 1-8962
    
    5-15-0310.74b
    
    Pinnacle West
APS
    
    Summary of James M.
Levine Retirement
Benefits
    
    10.2 to Pinnacle Wests March 2002 Form
10-Q Report, File No. 1-8962
    
    5-15-0210.75b
    
    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
    
    11-14-0210.75.1b
    
    Pinnacle West
APS
    
    Amendment to
Agreement between
APS and James M.
Levine effective October 11, 2002
    
    10.2 to Pinnacle Wests September 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
    
    Effective10.75.2b
    
    Pinnacle West
APS
    
    Amendment to
Agreement between
APS and James M.
Levine effective as
of 1-1-05
    
    10.79.2 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.76b
    
    Pinnacle West
APS
    
    Letter Agreement
dated June 28, 2001
between Pinnacle
West Capital
Corporation and
Steve Wheeler
    
    10.4 to Pinnacle Wests 2002 Form 10-K
Report, File No. 1-8962
    
    3-31-0310.77bd
    
    Pinnacle West
APS
    
    Key Executive
Employment and
Severance Agreement
between Pinnacle
West and certain
executive officers
of Pinnacle West
and its
subsidiaries10.78b
    
    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
    
    4-16-9410.79b
    
    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
    
    3-30-00
 172




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.80b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.5 to Pinnacle Wests 2002 Form 10-K
Report
    
    3-31-0310.81b
    
    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
    
    7-3-0010.82
    
    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
    
    3-19-9210.83
    
    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
    
    5-15-9810.84
    
    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
    
    5-15-98
 173




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.85
    
    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
    
    5-15-9810.86
    
    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
    
    6-26-9810.87bd
    
    Pinnacle West
APS
    
    Performance Share
Agreement under the
Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.1 to Pinnacle West/APS December 9,
2005 Form 8-K Report, File Nos. 1-8962
and 1-4473
    
    12-15-0510.88bd
    
    Pinnacle West
APS
    
    Performance Share
Agreement under the
Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.1 to Pinnacle West/APS December 31,
2005 Form
8-K Report, File Nos. 1-8962 and 1-4473
    
    2-1-0610.89bd
    
    Pinnacle West
APS
    
    Performance
Accelerated Stock
Option Agreement
under Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.98 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-05
 174




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.90bd
    
    Pinnacle West
APS
    
    Stock Ownership
Incentive Agreement
under Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan
    
    10.99 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.91bd
    
    Pinnacle West
APS
    
    Performance Share Agreement
under the Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan10.92bd
    
    Pinnacle West
APS
    
    Summary of 2006 CEO
Variable Incentive
Plan and Officer
Variable Incentive
Plan10.93
    
    Pinnacle West
APS
    
    Amended and
Restated
Reimbursement
Agreement among
APS, the Banks
party thereto, and
JPMorgan Chase
Bank, as
Administrative
Agent and Issuing
Bank, dated as of
July 22, 2002
    
    10.100 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.94
    
    Pinnacle West
APS
    
    Three-Year Credit
Agreement dated as
of May 21, 2004
between APS as
Borrower, and the
banks, financial
institutions and
other institutional
lenders and initial
issuing banks
listed on the
signature pages
thereof
    
    10.101 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.95
    
    Pinnacle West
APS
    
    Amended and
Restated Five-Year
Credit Agreement
dated as of
December 9, 2005
between APS, as
Borrower, Citibank,
N.A., as Agent, and
the lenders and
other parties
thereto10.96
    
    Pinnacle West
    
    $200,000,000 Senior
Notes Uncommitted
Master Shelf
Agreement dated as
of February 28,
2006
 175




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.97
    
    Pinnacle West
    
    Amended and
Restated Credit
Agreement dated as
of December 9, 2005
among Pinnacle West
Capital
Corporation, as
Borrower, JPMorgan
Chase Bank, N.A.,
as Agent, and the
other agent parties
thereto10.98
    
    Pinnacle West
APS
    
    Agreement between
Pinnacle West
Energy Corporation
and Arizona Public
Service Company for
Transportation and
Treatment of
Effluent by and
between Pinnacle
West Energy
Corporation and APS
dated as of the
10th day
of April, 2001
    
    10.102 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.99
    
    Pinnacle West
APS
    
    Agreement for the
Transfer and Use of
Wastewater and
Effluent by and
between APS, SRP
and PWE dated June
1, 2001
    
    10.103 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.100
    
    Pinnacle West
APS
    
    Agreement for the
Sale and Purchase
of Wastewater
Effluent dated
November 13, 2000,
by and between the
City of Tolleson,
Arizona, APS and
SRP
    
    10.104 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-0510.101
    
    Pinnacle West
APS
    
    Operating Agreement
for the
Co-Ownership of
Wastewater Effluent
dated November 16,
2000 by and between
APS and SRP
    
    10.105 to Pinnacle West/APS 2004 Form
10-K Report, File Nos. 1-8962 and 1-4473
    
    3-16-05
 176




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.102
    
    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
    
    8-9-0410.102.1
    
    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
    
    12-20-0410.103
    
    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
    
    11-8-0410.104b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
Supplemental 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
    
    3-15-0410.105b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
and Arizona Public
Service Company
Directors
Retirement Plan, as
amended and
restated on June
21, 2000
    
    99.2 to Pinnacle Wests Registration
Statement on Form S-8 No. 333-40796,
File No. 1-8962
    
    7-3-00
 177




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective10.106
    
    Pinnacle West
APS
    
    Agreement for the
Sale and Purchase
of Wastewater
Effluent with City
of Tolleson and
Salt River
Agricultural
Improvement and
Power District,
dated June 12,
1981, including
Amendment No. 1
dated as of
November 12, 1981
and Amendment No. 2
dated as of June 4,
1986
    
    10.4 to APS 1991 Form 10-K Report, File
1-4473
    
    3-19-9210.107
    
    Pinnacle West
APS
    
    Navajo Project Co-Tenancy Agreement
dated as of March 23, 1976, and Supplement No. 1 thereto
dated as of October 18, 1976, Amendment No. 1 dated as of
July 5, 1988, and Amendment No. 2 dated as of
June 14, 1996, Amendment No. 3 dated as of
February 11, 1997; Amendment No. 4 dated as of
January 21, 1997; Amendment No. 5 dated as of
January 23, 1998; Amendment No. 6 dated as of July 31,
1998.10.108
    
    Pinnacle West
APS
    
    Navajo Project Participation
Agreement dated as of September 30, 1969, and Amendment and
Supplement No. 1 dated as of January 16, 1970, and
Coordinating Committee Agreement No. 1 dated as of September 31, 1971.12.1
    
    Pinnacle West
    
    Ratio of Earnings
to Fixed Charges12.2
    
    APS
    
    Ratio of Earnings
to Fixed Charges12.3
    
    Pinnacle West
    
    Ratio of Earnings
to Combined Fixed Charges
and Preferred Stock Dividend Requirements21.1
    
    Pinnacle West
    
    Subsidiaries of
Pinnacle West23.1
    
    Pinnacle West
    
    Consent of Deloitte
& Touche LLP23.2
    
    APS
    
    Consent of Deloitte
& Touche LLP31.1
    
    Pinnacle West
    
    Certificate of
William J. Post,
Chief Executive
Officer, pursuant
to Rule 13a-14(a)
and Rule 15d-14(a)
of the Securities
Exchange Act, as
amended
 178




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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
 179




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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
 180




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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
 181




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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
 182




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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
 183




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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
 184




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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
 185




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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
 186




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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
 187




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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
    
    8-10-87
 188




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective99.22
    
    Pinnacle West
APS
    
    Arizona Corporation
Commission Order,
Decision No. 61969,
dated September 29,
1999, including the
Retail Electric
Competition Rules
    
    10.2 to APS September 1999 Form 10-Q
Report, File No. 1-4473
    
    11-15-9999.23
    
    Pinnacle West
APS
    
    ACC Decision No.
65796 dated April
4, 2003 (Financing
Order)
    
    99.3 to Pinnacle Wests March 2003 Form
10-Q Report, File No. 1-8962
    
    5-15-0399.24
    
    Pinnacle West
APS
    
    Proposed Settlement
of Docket
E-01345A-03-0437,
APS Request for
Rate Adjustment,
dated August 18,
2004
    
    99.1 to Pinnacle Wests August 18, 2004
Form 8-K Report, File No. 1-8962
    
    8-18-04
 189




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective99.25
    
    Pinnacle West
APS
    
    Opinion and Order,
ACC Decision No.
67744 dated April
7, 2005 (see
Exhibit 99.24
herein for
Attachment A to the
Opinion and Order,
the 2004 Settlement
Agreement)
    
    99.5 to Pinnacle West/APS March 2005
Form 10-Q Report, File Nos. 1-8962 and
1-4473
    
    5-10-0599.26
    
    Pinnacle West
    
    Purchase Agreement
by and among
Pinnacle West
Energy Corporation
and GenWest, L.L.C.
and Nevada Power
Company, dated June
21, 2005
    
    99.5 to Pinnacle West/APS June 2005 Form
10-Q Report, File Nos. 1-8962 and 1-4473
    
    8-9-0599.27
    
    Pinnacle West
APS
    
    Amended and
Restated
Reimbursement
Agreement among
Arizona Public
Service Company,
The Banks party
thereto and
JPMorgan Chase
Bank, N.A., as
Administrative
Agent and Issuing
Bank, and Barclays
Bank PLC, as
Syndication Agent,
dated as of May 19,
2005
    
    99.6 to PinnacleWest/APS June 2005 Form
10-Q Report, File Nos. 1-8962 and 1-4473
    
    8-9-0599.28
    
    Pinnacle West
APS
    
    Application for
Emergency Interim
Rate Increase and
Interim Amendment
to Decision No.
67744
    
    99.1 to Pinnacle West/APS January 6,
2006 Form 8-K Report, File Nos. 1-8962
and 1-4473
    
    1-9-06
 190




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##### Table of Contents



Exhibit
    
    
    
    
    
    
    
    DateNo.
    
    Registrant(s)
    
    Description
    
    Previously Filed as Exhibit:a
    
    Effective99.29
    
    Pinnacle West
    
    Non-GAAP Financial
Measure
Reconciliation -
Operating Income
(GAAP measure) to
Gross Margin
(non-GAAP financial
measure)99.30
    
    APS
    
    Non-GAAP Financial
Measure
Reconciliation -
Operating Income
(GAAP measure) to
Gross Margin
(non-GAAP financial
measure)
 
 a
    
    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. 191




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##### Table of Contents



SIGNATURES
  PINNACLE WEST CAPITAL CORPORATION(Registrant)Date:
March 10, 2006/s/ William J. Post(William J. Post, Chairman of the
Board of Directors and Chief
Executive Officer)
 Power of Attorney
   Signature
    
    Title
    
    Date/s/ William J. Post
    
    Principal Executive Officer and
Director
    
    March 10, 2006(William J. Post, Chairman
of the Board of Directors and
Chief Executive Officer)/s/ Jack E. Davis
    
    Director
    
    March 10, 2006(Jack E. Davis, President
and Chief Operating Officer)/s/ Donald E. Brandt
    
    Principal Accounting Officer and
    
    March 10, 2006(Donald E. Brandt,
Executive Vice President and
Chief Financial Officer)
    
    Principal Financial Officer
 192




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Edward N. Basha, Jr.
    
    Director
    
    March 10, 2006(Edward N. Basha, Jr.)/s/ Michael L. Gallagher
    
    Director
    
    March 10, 2006(Michael L. Gallagher)/s/ Pamela Grant
    
    Director
    
    March 10, 2006(Pamela Grant)/s/ Roy A. Herberger, Jr.
    
    Director
    
    March 10, 2006(Roy A. Herberger, Jr.)/s/ Martha O. Hesse
    
    Director
    
    March 10, 2006(Martha O. Hesse)/s/ William S. Jamieson, Jr.
    
    Director
    
    March 10, 2006(William S. Jamieson, Jr.)/s/ Humberto S. Lopez
    
    Director
    
    March 10, 2006(Humberto S. Lopez)/s/ Kathryn L. Munro
    
    Director
    
    March 10, 2006(Kathryn L. Munro)/s/ Bruce J. Nordstrom
    
    Director
    
    March 10, 2006(Bruce J. Nordstrom)/s/ William L. Stewart
    
    Director
    
    March 10, 2006(William L. Stewart)
 193




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##### Table of Contents



SIGNATURES
  ARIZONA PUBLIC SERVICE COMPANY(Registrant)Date:
March 10, 2006
    
    /s/ Jack E. Davis(Jack E. Davis, President and Chief Executive Officer)
 Power of Attorney
   Signature
    
    Title
    
    Date/s/ William J. Post
    
    Director
    
    March 10, 2006(William J. Post, Chairman
of the Board of Directors )/s/ Jack E. Davis
    
    Principal Executive Officer and
Director
    
    March 10, 2006(Jack E. Davis, President
and Chief Executive Officer)/s/ Donald E. Brandt
    
    Principal Financial Officer
    
    March 10, 2006(Donald E. Brandt,
Executive Vice President,
and Chief Financial Officer)/s/ Chris N. Froggatt
    
    Principal Accounting Officer
    
    March 10, 2006(Chris N. Froggatt,
Vice President and Controller)
 194




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Edward N. Basha, Jr.
    
    Director
    
    March 10, 2006(Edward N. Basha, Jr.)/s/ Michael L. Gallagher
    
    Director
    
    March 10, 2006(Michael L. Gallagher)/s/ Pamela Grant
    
    Director
    
    March 10, 2006(Pamela Grant)/s/ Roy A. Herberger, Jr.
    
    Director
    
    March 10, 2006(Roy A. Herberger, Jr.)/s/ Martha O. Hesse
    
    Director
    
    March 10, 2006(Martha O. Hesse)/s/ William S. Jamieson, Jr.
    
    Director
    
    March 10, 2006(William S. Jamieson, Jr.)/s/ Humberto S. Lopez
    
    Director
    
    March 10, 2006(Humberto S. Lopez)/s/ Kathryn L. Munro
    
    Director
    
    March 10, 2006(Kathryn L. Munro)/s/ Bruce J. Nordstrom
    
    Director
    
    March 10, 2006(Bruce J. Nordstrom)/s/ William L. Stewart
    
    Director
    
    March 10, 2006(William L. Stewart)
 195




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##### Table of Contents



Exhibit Index
 ExhibitNo.
    
    Registrant(s)
    
    Description10.48b
    
    Pinnacle West
APS
    
    Pinnacle West
Capital Corporation
Supplemental Excess
Benefit Retirement
Plan, as amended
and restated, dated
December 18, 200310.64b
    
    Pinnacle West
APS
    
    Fourth Amendment to the Pinnacle
West Capital Corporation, Arizona Public Service Company, SunCor
Development Company and El Dorado Investment Company Deferred
Compensation Plan, effective January 1, 2003.10.77bd
    
    Pinnacle West
APS
    
    Key Executive
Employment and
Severance Agreement
between Pinnacle
West and certain
executive officers
of Pinnacle West
and its
subsidiaries10.91bd
    
    Pinnacle West
APS
    
    Performance Share Agreement
under the Pinnacle West
Capital Corporation
2002 Long-Term
Incentive Plan10.92bd
    
    Pinnacle West
APS
    
    Summary of 2006 CEO
Variable Incentive
Plan and Officer
Variable Incentive
Plan10.95
    
    Pinnacle West
APS
    
    Amended and
Restated Five-Year
Credit Agreement
dated as of
December 9, 2005
between APS, as
Borrower, Citibank,
N.A., as Agent, and
the lenders and
other parties
thereto10.96
    
    Pinnacle West
    
    $200,000,000 Senior
Notes Uncommitted
Master Shelf
Agreement dated as
of February 28,
200610.97
    
    Pinnacle West
    
    Amended and
Restated Credit
Agreement dated as
of December 9, 2005
among Pinnacle West
Capital
Corporation, as
Borrower, JPMorgan
Chase Bank, N.A.,
as Agent, and the
other agent parties
thereto10.107
    
    Pinnacle West
APS
    
    Navajo Project Co-Tenancy Agreement
dated as of March 23, 1976, and Supplement No. 1 thereto
dated as of October 18, 1976, Amendment No. 1 dated as of
July 5, 1988, and Amendment No. 2 dated as of June 14, 1996, Amendment No. 3 dated as of
February 11, 1997; Amendment No. 4 dated as of
January 21, 1997; Amendment No. 5 dated as of
January 23, 1998; Amendment No. 6 dated as of July 31,
1998.10.108
    
    Pinnacle West
APS
    
    Navajo Project Participation
Agreement dated as of September 30, 1969, and Amendment and
Supplement No. 1 dated as of January 16, 1970, and
Coordinating Committee Agreement No. 1 dated as of September 31, 1971.12.1
    
    Pinnacle West
    
    Ratio of Earnings
to Fixed Charges12.2
    
    APS
    
    Ratio of Earnings
to Fixed Charges12.3
    
    Pinnacle West
    
    Ratio of Earnings
to Combined Fixed Charges
and Preferred Stock Dividend Requirements21.1
    
    Pinnacle West
    
    Subsidiaries of
Pinnacle West23.1
    
    Pinnacle West
    
    Consent of Deloitte
& Touche LLP23.2
    
    APS
    
    Consent of Deloitte
& Touche LLP31.1
    
    Pinnacle West
    
    Certificate of
William J. Post,
Chief Executive
Officer, pursuant
to Rule 13a-14(a)
and Rule 15d-14(a)
of the Securities
Exchange Act, as
amended31.2
    
    Pinnacle West
    
    Certificate of
Donald E. Brandt,
Chief Financial
Officer, pursuant
to Rule 13a-14(a)
and Rule 15d-14(a)
of the Securities
Exchange Act, as
amended31.3
    
    APS
    
    Certificate of Jack
E. Davis, Chief
Executive Officer,
pursuant to Rule
13a-14(a) and Rule
15d-14(a) of the
Securities Exchange
Act, as amended31.4
    
    APS
    
    Certificate of
Donald E. Brandt,
Chief Financial
Officer, pursuant
to Rule 13a-14(a)
and Rule 15d-14(a)
of the Securities
Exchange Act, as
amended32.1
    
    Pinnacle West
    
    Certification of
Chief Executive
Officer and Chief
Financial Officer,
pursuant to 18
U.S.C. Section
1850, as adopted
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 200232.2
    
    APS
    
    Certification of
Chief Executive
Officer and Chief
Financial Officer,
pursuant to 18
U.S.C. Section
1850, as adopted
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 200299.29
    
    Pinnacle West
    
    Non-GAAP Financial
Measure
Reconciliation -
Operating Income
(GAAP measure) to
Gross Margin
(non-GAAP financial
measure)99.30
    
    APS
    
    Non-GAAP Financial
Measure
Reconciliation -
Operating Income
(GAAP measure) to
Gross Margin
(non-GAAP financial
measure)
 
 a
    
    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.