Table of Contents

 
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
(Mark One)
			
þ	 	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended June 30, 2008
OR
 	 	 	
o	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the transition period from                      to                      _
 	 	 	 	 	
 	 	Exact Name of Each Registrant as specified in	 	 	
Commission	 	its charter; State of Incorporation; Address;	 	IRS Employer	
File Number	 	and Telephone Number	 	Identification No.	
1-8962	 	PINNACLE WEST CAPITAL CORPORATION	 	86-0512431	
 	 	(an Arizona corporation)	 	 	
 	 	400 North Fifth Street, P.O. Box 53999	 	 	
 	 	Phoenix, Arizona 85072-3999	 	 	
 	 	(602) 250-1000	 	 	
1-4473	 	ARIZONA PUBLIC SERVICE COMPANY	 	86-0011170	
 	 	(an Arizona corporation)	 	 	
 	 	400 North Fifth Street, P.O. Box 53999	 	 	
 	 	Phoenix, Arizona 85072-3999	 	 	
 	 	(602) 250-1000	 	 	
 	
     Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
			
PINNACLE WEST CAPITAL CORPORATION	 	Yes þ No o	
ARIZONA PUBLIC SERVICE COMPANY	 	Yes þ No o	
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
PINNACLE WEST CAPITAL CORPORATION
Large accelerated filer       þ      Accelerated filer       o      Non-accelerated filer       o       Smaller reporting company o
ARIZONA PUBLIC SERVICE COMPANY
Large accelerated filer       o      Accelerated filer       o      Non-accelerated filer       þ       Smaller reporting company o
     Indicate by check mark whether each registrant is a shell company (as defined in Exchange Act Rule 12b-2).
			
PINNACLE WEST CAPITAL CORPORATION	 	Yes o No þ	
ARIZONA PUBLIC SERVICE COMPANY	 	Yes o No þ	
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
 	 	 	
PINNACLE WEST CAPITAL CORPORATION	 	Number of shares of common stock, no par value, outstanding as of August 4, 2008: 100,733,570	
ARIZONA PUBLIC SERVICE COMPANY	 	Number of shares of common stock, $2.50 par value, outstanding as of August 4, 2008: 71,264,947	
 	
      Arizona Public Service Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.
     This combined Form 10-Q is separately filed by Pinnacle West Capital Corporation and Arizona Public Service Company. Each registrant is filing on its own behalf all of the information contained in this Form 10-Q that relates to such registrant and, where required, its subsidiaries. Except as stated in the preceding sentence, neither registrant is filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.

   

 

TABLE OF CONTENTS
 	 	 	 	 	
 	 	Page	 	
 		
Glossary	 	 	2	 	
Part I	 	 	4	 	
Item 1. Financial Statements	 	 	4	 	
Pinnacle West Capital Corporation	 	 	4	 	
Arizona Public Service Company	 	 	33	 	
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	44	 	
Item 3. Quantitative and Qualitative Disclosures About Market Risk	 	 	67	 	
Item 4. Controls and Procedures	 	 	67	 	
 	 	 	 	 	
Part II	 	 	68	 	
Item 1. Legal Proceedings	 	 	68	 	
Item 1A. Risk Factors	 	 	68	 	
Item 4. Submission of Matters to a Vote of Security Holders	 	 	68	 	
Item 5. Other Information	 	 	69	 	
Item 6. Exhibits	 	 	71	 	
Signatures	 	 	74	 	
  EX-3.1	
  EX-10.1	
  EX-10.2	
  EX-10.3	
  EX-10.4	
  EX-10.5	
  EX-10.6	
  EX-10.7	
  EX-12.1	
  EX-12.2	
  EX-12.3	
  EX-31.1	
  EX-31.2	
  EX-31.3	
  EX-32.1	
  EX-32.2	

Table of Contents

GLOSSARY
ACC — Arizona Corporation Commission
ADEQ — Arizona Department of Environmental Quality
ALJ — Administrative Law Judge
APS — Arizona Public Service Company, a subsidiary of the Company
APSES — APS Energy Services Company, Inc., a subsidiary of the Company
Base Fuel Rate — the portion of APS’ retail base rates attributable to fuel and purchased power costs
Clean Air Act — Clean Air Act, as amended
Company — Pinnacle West Capital Corporation
DOE — United States Department of Energy
El Dorado — El Dorado Investment Company, a subsidiary of the Company
EPA — United States Environmental Protection Agency
ERMC — Energy Risk Management Committee
FASB — Financial Accounting Standards Board
FERC — United States Federal Energy Regulatory Commission
FIN — FASB Interpretation Number
Fitch — Fitch, Inc.
GAAP — accounting principles generally accepted in the United States of America
IRS — United States Internal Revenue Service
kWh — kilowatt-hour, one thousand watts per hour
Moody’s — Moody’s Investors Service, Inc.
Native Load — retail and wholesale sales supplied under traditional cost-based rate regulation
Note — a Note to Pinnacle West’s Condensed Consolidated Financial Statements in Item 1 of this report
NRC — United States Nuclear Regulatory Commission
OCI — other comprehensive income
Off-System Sales — sales of electricity from generation owned or contracted by the Company that is over and above the amount required to serve APS’ retail customers and traditional wholesale contracts
Palo Verde — Palo Verde Nuclear Generating Station
Pinnacle West — Pinnacle West Capital Corporation, the Company
Pinnacle West Energy — Pinnacle West Energy Corporation, a subsidiary of the Company, dissolved as of August 31, 2006
Pinnacle West Marketing & Trading — Pinnacle West Marketing & Trading Co., LLC, a subsidiary of the Company
PRP — potentially responsible parties under Superfund
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PSA — power supply adjustor approved by the ACC to provide for recovery or refund of variations in actual fuel and purchased power costs compared with the Base Fuel Rate
Salt River Project — Salt River Project Agricultural Improvement and Power District
SEC — United States Securities and Exchange Commission
SFAS — Statement of Financial Accounting Standards
Standard & Poor’s — Standard & Poor’s Ratings Services
SunCor — SunCor Development Company, a subsidiary of the Company
Superfund — Comprehensive Environmental Response, Compensation and Liability Act
2005 Deferrals — PSA deferrals related to 2005 replacement power costs associated with Palo Verde outages
2007 Form 10-K — Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2007
VIE — variable interest entity
 3 

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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	June 30,	 	
 	 	2008	 	 	2007	 	
OPERATING REVENUES	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	829,478	 	 	$	711,293	 	
Real estate segment	 	 	36,880	 	 	 	47,819	 	
Marketing and trading	 	 	50,673	 	 	 	92,637	 	
Other revenues	 	 	9,162	 	 	 	11,153	 	
 	 	 	 	 	 	 	
Total	 	 	926,193	 	 	 	862,902	 	
 	 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	 	 	 	
Regulated electricity segment fuel and purchased power	 	 	327,561	 	 	 	270,337	 	
Real estate segment operations	 	 	41,746	 	 	 	45,917	 	
Marketing and trading fuel and purchased power	 	 	45,245	 	 	 	74,533	 	
Operations and maintenance	 	 	194,909	 	 	 	177,310	 	
Depreciation and amortization	 	 	97,784	 	 	 	92,476	 	
Taxes other than income taxes	 	 	33,251	 	 	 	34,757	 	
Other expenses	 	 	6,822	 	 	 	8,803	 	
 	 	 	 	 	 	 	
Total	 	 	747,318	 	 	 	704,133	 	
 	 	 	 	 	 	 	
OPERATING INCOME	 	 	178,875	 	 	 	158,769	 	
 	 	 	 	 	 	 	
OTHER	 	 	 	 	 	 	 	 	
Allowance for equity funds used during construction	 	 	5,414	 	 	 	5,195	 	
Other income (Note 14)	 	 	3,928	 	 	 	5,869	 	
Other expense (Note 14)	 	 	(10,063	)	 	 	(3,269	)	
 	 	 	 	 	 	 	
Total	 	 	(721	)	 	 	7,795	 	
 	 	 	 	 	 	 	
INTEREST EXPENSE	 	 	 	 	 	 	 	 	
Interest charges	 	 	51,583	 	 	 	51,827	 	
Capitalized interest	 	 	(4,938	)	 	 	(5,213	)	
 	 	 	 	 	 	 	
Total	 	 	46,645	 	 	 	46,614	 	
 	 	 	 	 	 	 	
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	 	 	131,509	 	 	 	119,950	 	
INCOME TAXES	 	 	17,076	 	 	 	40,713	 	
 	 	 	 	 	 	 	
INCOME FROM CONTINUING OPERATIONS	 	 	114,433	 	 	 	79,237	 	
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	 	 	 	 	 	 	 	 	
Net of income tax expense (benefit) of $12,608 and $(171) (Note 17)	 	 	19,429	 	 	 	(243	)	
 	 	 	 	 	 	 	
NET INCOME	 	$	133,862	 	 	$	78,994	 	
 	 	 	 	 	 	 	
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC	 	 	100,653	 	 	 	100,229	 	
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — DILUTED	 	 	100,917	 	 	 	100,779	 	
 	 	 	 	 	 	 	 	 	
EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING	 	 	 	 	 	 	 	 	
Income from continuing operations — basic	 	$	1.14	 	 	$	0.79	 	
Net income — basic	 	 	1.33	 	 	 	0.79	 	
Income from continuing operations — diluted	 	 	1.13	 	 	 	0.79	 	
Net income — diluted	 	 	1.33	 	 	 	0.78	 	
DIVIDENDS DECLARED PER SHARE	 	$	0.525	 	 	$	0.525	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)
 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	 	
 	 	June 30,	 	
 	 	2008	 	 	2007	 	
OPERATING REVENUES	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	1,452,279	 	 	$	1,247,344	 	
Real estate segment	 	 	84,622	 	 	 	124,951	 	
Marketing and trading	 	 	108,131	 	 	 	165,108	 	
Other revenues	 	 	17,899	 	 	 	20,516	 	
 	 	 	 	 	 	 	
Total	 	 	1,662,931	 	 	 	1,557,919	 	
 	 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	 	 	 	
Regulated electricity segment fuel and purchased power	 	 	596,939	 	 	 	473,690	 	
Real estate segment operations	 	 	89,965	 	 	 	107,253	 	
Marketing and trading fuel and purchased power	 	 	96,767	 	 	 	132,477	 	
Operations and maintenance	 	 	389,033	 	 	 	348,888	 	
Depreciation and amortization	 	 	193,391	 	 	 	181,854	 	
Taxes other than income taxes	 	 	66,403	 	 	 	69,476	 	
Other expenses	 	 	12,760	 	 	 	17,291	 	
 	 	 	 	 	 	 	
Total	 	 	1,445,258	 	 	 	1,330,929	 	
 	 	 	 	 	 	 	
OPERATING INCOME	 	 	217,673	 	 	 	226,990	 	
 	 	 	 	 	 	 	
OTHER	 	 	 	 	 	 	 	 	
Allowance for equity funds used during construction	 	 	11,538	 	 	 	9,639	 	
Other income (Note 14)	 	 	7,776	 	 	 	8,642	 	
Other expense (Note 14)	 	 	(14,971	)	 	 	(7,883	)	
 	 	 	 	 	 	 	
Total	 	 	4,343	 	 	 	10,398	 	
 	 	 	 	 	 	 	
INTEREST EXPENSE	 	 	 	 	 	 	 	 	
Interest charges	 	 	106,349	 	 	 	101,953	 	
Capitalized interest	 	 	(10,617	)	 	 	(10,020	)	
 	 	 	 	 	 	 	
Total	 	 	95,732	 	 	 	91,933	 	
 	 	 	 	 	 	 	
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	 	 	126,284	 	 	 	145,455	 	
INCOME TAXES	 	 	16,519	 	 	 	49,754	 	
 	 	 	 	 	 	 	
INCOME FROM CONTINUING OPERATIONS	 	 	109,765	 	 	 	95,701	 	
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	 	 	 	 	 	 	 	 	
Net of income tax expense (benefit) of $12,728 and $(125) (Note 17)	 	 	19,624	 	 	 	(177	)	
 	 	 	 	 	 	 	
NET INCOME	 	$	129,389	 	 	$	95,524	 	
 	 	 	 	 	 	 	
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — BASIC	 	 	100,587	 	 	 	100,138	 	
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING — DILUTED	 	 	100,856	 	 	 	100,718	 	
 	 	 	 	 	 	 	 	 	
EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING	 	 	 	 	 	 	 	 	
Income from continuing operations — basic	 	$	1.09	 	 	$	0.96	 	
Net income — basic	 	 	1.29	 	 	 	0.95	 	
Income from continuing operations — diluted	 	 	1.09	 	 	 	0.95	 	
Net income — diluted	 	 	1.28	 	 	 	0.95	 	
DIVIDENDS DECLARED PER SHARE	 	$	1.05	 	 	$	1.05	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	June 30,	 	 	December 31,	 	
 	 	2008	 	 	2007	 	
ASSETS	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
CURRENT ASSETS	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	96,548	 	 	$	56,321	 	
Customer and other receivables	 	 	503,668	 	 	 	456,007	 	
Allowance for doubtful accounts	 	 	(2,520	)	 	 	(4,782	)	
Materials and supplies (at average cost)	 	 	158,059	 	 	 	149,759	 	
Fossil fuel (at average cost)	 	 	23,480	 	 	 	27,792	 	
Deferred income taxes	 	 	—	 	 	 	31,510	 	
Home inventory	 	 	83,556	 	 	 	98,729	 	
Assets from risk management and trading activities (Note 10)	 	 	153,403	 	 	 	57,605	 	
Other current assets	 	 	19,773	 	 	 	33,988	 	
 	 	 	 	 	 	 	
Total current assets	 	 	1,035,967	 	 	 	906,929	 	

INVESTMENTS AND OTHER ASSETS	 	 	 	 	 	 	 	 	
Real estate investments — net	 	 	463,558	 	 	 	532,600	 	
Assets from long-term risk management and trading activities (Note 10)	 	 	283,381	 	 	 	48,928	 	
Nuclear decommissioning trust (Note 18)	 	 	369,473	 	 	 	379,347	 	
Other assets	 	 	114,163	 	 	 	117,941	 	
 	 	 	 	 	 	 	
Total investments and other assets	 	 	1,230,575	 	 	 	1,078,816	 	

PROPERTY, PLANT AND EQUIPMENT	 	 	 	 	 	 	 	 	
Plant in service and held for future use	 	 	12,031,555	 	 	 	11,640,739	 	
Less accumulated depreciation and amortization	 	 	4,057,034	 	 	 	4,004,944	 	
 	 	 	 	 	 	 	
Net	 	 	7,974,521	 	 	 	7,635,795	 	
Construction work in progress	 	 	498,608	 	 	 	625,577	 	
Intangible assets, net of accumulated amortization	 	 	102,355	 	 	 	105,746	 	
Nuclear fuel, net of accumulated amortization	 	 	97,730	 	 	 	69,271	 	
 	 	 	 	 	 	 	
Total property, plant and equipment	 	 	8,673,214	 	 	 	8,436,389	 	

DEFERRED DEBITS	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power regulatory asset (Note 5)	 	 	22,530	 	 	 	110,928	 	
Other regulatory assets	 	 	501,469	 	 	 	514,353	 	
Other deferred debits	 	 	114,235	 	 	 	114,794	 	
 	 	 	 	 	 	 	
Total deferred debits	 	 	638,234	 	 	 	740,075	 	

TOTAL ASSETS	 	$	11,577,990	 	 	$	11,162,209	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	June 30,	 	 	December 31,	 	
 	 	2008	 	 	2007	 	
LIABILITIES AND COMMON STOCK EQUITY	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
CURRENT LIABILITIES	 	 	 	 	 	 	 	 	
Accounts payable	 	$	309,305	 	 	$	323,346	 	
Accrued taxes (Note 8)	 	 	99,610	 	 	 	269,628	 	
Accrued interest	 	 	39,145	 	 	 	39,836	 	
Short-term borrowings	 	 	266,451	 	 	 	340,661	 	
Current maturities of long-term debt (Note 4)	 	 	122,847	 	 	 	163,773	 	
Customer deposits	 	 	78,687	 	 	 	80,010	 	
Deferred income taxes	 	 	105,822	 	 	 	—	 	
Liabilities from risk management and trading activities (Note 10)	 	 	58,189	 	 	 	24,510	 	
Other current liabilities	 	 	103,663	 	 	 	102,685	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	1,183,719	 	 	 	1,344,449	 	

LONG-TERM DEBT LESS CURRENT MATURITIES (NOTE 4)	 	 	3,086,185	 	 	 	3,127,125	 	

DEFERRED CREDITS AND OTHER	 	 	 	 	 	 	 	 	
Deferred income taxes	 	 	1,380,734	 	 	 	1,243,743	 	
Regulatory liabilities	 	 	806,911	 	 	 	642,564	 	
Liability for asset retirements	 	 	267,544	 	 	 	281,903	 	
Liabilities for pension and other postretirement benefits (Note 6)	 	 	529,875	 	 	 	504,603	 	
Liabilities from long-term risk management and trading activities (Note 10)	 	 	29,719	 	 	 	4,701	 	
Other	 	 	545,490	 	 	 	481,510	 	
 	 	 	 	 	 	 	
Total deferred credits and other	 	 	3,560,273	 	 	 	3,159,024	 	

COMMITMENTS AND CONTINGENCIES (SEE NOTES)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
COMMON STOCK EQUITY	 	 	 	 	 	 	 	 	
Common stock, no par value	 	 	2,138,841	 	 	 	2,135,787	 	
Treasury stock	 	 	(3,398	)	 	 	(2,054	)	
 	 	 	 	 	 	 	
Total common stock	 	 	2,135,443	 	 	 	2,133,733	 	
 	 	 	 	 	 	 	
Accumulated other comprehensive income (loss) (Note 11):	 	 	 	 	 	 	 	 	
Pension and other postretirement benefits	 	 	(44,306	)	 	 	(39,336	)	
Derivative instruments	 	 	219,391	 	 	 	23,473	 	
 	 	 	 	 	 	 	
Total accumulated other comprehensive income (loss)	 	 	175,085	 	 	 	(15,863	)	
 	 	 	 	 	 	 	
Retained earnings	 	 	1,437,285	 	 	 	1,413,741	 	
 	 	 	 	 	 	 	
Total common stock equity	 	 	3,747,813	 	 	 	3,531,611	 	

TOTAL LIABILITIES AND COMMON STOCK EQUITY	 	$	11,577,990	 	 	$	11,162,209	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	 	
 	 	June 30,	 	
 	 	2008	 	 	2007	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	 	 	 	
Net Income	 	$	129,389	 	 	$	95,524	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
Depreciation and amortization including nuclear fuel	 	 	209,355	 	 	 	198,291	 	
Deferred fuel and purchased power	 	 	(25,867	)	 	 	(132,016	)	
Deferred fuel and purchased power amortization	 	 	114,265	 	 	 	140,925	 	
Deferred fuel and purchased power regulatory disallowance	 	 	—	 	 	 	14,370	 	
Allowance for equity funds used during construction	 	 	(11,538	)	 	 	(9,639	)	
Deferred income taxes	 	 	154,249	 	 	 	(3,333	)	
Change in mark-to-market valuations	 	 	(29,369	)	 	 	2,324	 	
Changes in current assets and liabilities:	 	 	 	 	 	 	 	 	
Customer and other receivables	 	 	(37,327	)	 	 	21,925	 	
Materials, supplies and fossil fuel	 	 	(3,988	)	 	 	(23,495	)	
Other current assets	 	 	22,531	 	 	 	3,810	 	
Accounts payable	 	 	(399	)	 	 	(13,644	)	
Other current liabilities	 	 	(24,373	)	 	 	64,091	 	
Expenditures for real estate investments	 	 	(15,614	)	 	 	(73,095	)	
Other changes in real estate assets	 	 	6,357	 	 	 	19,808	 	
Change in margin and collateral accounts	 	 	251,299	 	 	 	(56,546	)	
Change in unrecognized tax benefits	 	 	(115,337	)	 	 	—	 	
Change in other long-term assets	 	 	9,088	 	 	 	(20,138	)	
Change in other long-term liabilities	 	 	46,115	 	 	 	61,158	 	
 	 	 	 	 	 	 	
Net cash flow provided by operating activities	 	 	678,836	 	 	 	290,320	 	

CASH FLOWS FROM INVESTING ACTIVITIES	 	 	 	 	 	 	 	 	
Capital expenditures	 	 	(477,269	)	 	 	(453,839	)	
Contributions in aid of construction	 	 	22,970	 	 	 	16,055	 	
Capitalized interest	 	 	(10,617	)	 	 	(10,020	)	
Proceeds from sale of investment securities	 	 	—	 	 	 	69,225	 	
Purchases of investment securities	 	 	—	 	 	 	(36,525	)	
Proceeds from nuclear decommissioning trust sales	 	 	188,311	 	 	 	133,463	 	
Investment in nuclear decommissioning trust	 	 	(198,682	)	 	 	(143,834	)	
Proceeds from sale of commercial real estate investments	 	 	94,171	 	 	 	—	 	
Other	 	 	1,977	 	 	 	(2,981	)	
 	 	 	 	 	 	 	
Net cash flow used for investing activities	 	 	(379,139	)	 	 	(428,456	)	

CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	 	 	 	
Issuance of long-term debt	 	 	63,127	 	 	 	133,060	 	
Repayment of long-term debt	 	 	(147,467	)	 	 	(68,801	)	
Short-term borrowings and payments — net	 	 	(74,210	)	 	 	104,594	 	
Dividends paid on common stock	 	 	(105,592	)	 	 	(105,110	)	
Common stock equity issuance	 	 	5,562	 	 	 	17,930	 	
Other	 	 	(890	)	 	 	(7,275	)	
 	 	 	 	 	 	 	
Net cash flow (used for) provided by financing activities	 	 	(259,470	)	 	 	74,398	 	

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	 	 	40,227	 	 	 	(63,738	)	
 	 	 	 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	 	 	56,321	 	 	 	87,210	 	

CASH AND CASH EQUIVALENTS AT END OF PERIOD	 	$	96,548	 	 	$	23,472	 	

Supplemental disclosure of cash flow information	 	 	 	 	 	 	 	 	
Cash paid during the period for:	 	 	 	 	 	 	 	 	
Income taxes, net of refunds	 	$	10,809	 	 	$	40,714	 	
Interest, net of amounts capitalized	 	$	93,734	 	 	$	89,916	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidation and Nature of Operations
     The unaudited condensed consolidated financial statements include the accounts of Pinnacle West and our subsidiaries: APS, SunCor, APSES, El Dorado and Pinnacle West Marketing & Trading. Intercompany accounts and transactions between the consolidated companies have been eliminated. Our accounting records are maintained in accordance with GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. Condensed Consolidated Financial Statements
     Our unaudited condensed consolidated financial statements reflect all adjustments that we believe are necessary for the fair presentation of our financial position, results of operations and cash flows for the periods presented. These condensed consolidated statements and notes should be read in conjunction with the consolidated financial statements and related notes included in our 2007 Form 10-K. These condensed consolidated financial statements and notes have been prepared consistently with the 2007 Form 10-K with the exception of the following items: (1) we have reclassified certain prior-year real estate segment revenues and expenses to discontinued operations on our Condensed Consolidated Statements of Income in accordance with SFAS No. 144; (2) we have netted certain prior-year amounts on our Condensed Consolidated Balance Sheets and Statements of Cash Flows to reflect the adoption of FASB Staff Position No. FIN 39-1 (see Note 10); and (3) “contributions in aid of construction” was previously reported as part of “capital expenditures” on the Condensed Consolidated Statements of Cash Flows. This item has been disclosed separately to provide more detail.
3. Quarterly Fluctuations
     Weather conditions cause significant seasonal fluctuations in our revenues. In addition, real estate activities can have significant impacts on our results for interim periods. For these reasons, results for interim periods do not necessarily represent results expected for the year.
4. Liquidity Matters
     The following table shows principal payments due on Pinnacle West’s and APS’ total long-term debt and capitalized lease requirements as of June 30, 2008 (dollars in millions):
 	 	 	 	 	
 	 	Consolidated	 	 	
Year	 	Pinnacle West	 	APS	
2008	 	$103	 	$—	
2009	 	48	 	1	
2010	 	226	 	224	
2011	 	578	 	401	
2012	 	376	 	376	
Thereafter	 	1,886	 	1,884	
 	 	 	 	
Total	 	$3,217	 	$2,886	
 	 	 	 	
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     The interest rates on eleven issues of APS’ pollution control bonds, in the aggregate amount of approximately $343 million, are reset every seven days through auction processes. These bonds are supported by bond insurance policies provided by Ambac Assurance Corporation, and the interest rates on the bonds can be directly affected by the rating of the bond insurer. Certain bond insurers have had actual or potential downgrades of their “AAA” credit ratings due to their insuring certain mortgage-backed securities and collateralized debt obligations. Downgrades of bond insurers also increase the possibility of a “failed auction,” which results in higher interest rates during the failed auction periods. During the first quarter of 2008, we had seven failed auctions, which represented about 5% of all of our auctions for the quarter. When the auctions failed, the bondholders received the maximum 14% annual interest rate for the week of the failed auction. The bonds were successfully re-auctioned the following week. We had no failed auctions during the second quarter of 2008 and the average interest rate at the end of the quarter on the auction rate securities was 4.8%. We continue to monitor this market. We do not expect, however, that our auction rate interest exposure will have a material adverse impact on our financial position, results of operations, cash flows or liquidity.
     An existing ACC order requires APS to maintain a common equity ratio of at least 40%. As defined in the ACC order, the common equity ratio is common equity divided by the sum of common equity and long-term debt, including current maturities of long-term debt. At June 30, 2008, APS’ common equity ratio, as defined, was 55%, its total common equity was approximately $3.6 billion, and its total capitalization was approximately $6.5 billion. APS would be prohibited from paying dividends if its common equity falls below approximately $2.6 billion, assuming APS’ total capitalization remains the same.
     SunCor has a $150 million loan facility secured primarily by an interest in land, commercial properties, land contracts and homes under construction. The loan facility requires compliance with certain loan covenants pertaining to debt to net worth, debt service, liquidity, cash flow coverage and restrictions on debt. As of June 30, 2008, the amount of SunCor’s net assets that could not be transferred to Pinnacle West in the form of cash dividends as a result of these covenants was approximately $224 million.
     As a result of the restrictions in the preceding two paragraphs, as of June 30, 2008, the restricted net assets of our subsidiaries exceeded 25% of our consolidated net assets (at June 30, 2008, our consolidated net assets were approximately $3.7 billion). These restrictions do not materially affect Pinnacle West’s ability to meet its ongoing capital requirements.
      5. Regulatory Matters
      2008 General Rate Case
     On June 2, 2008, APS filed with the ACC updated financial statements, testimony and other data in the general rate case originally filed on March 24, 2008. As requested by the ACC staff, the updated information reflects a test year ended December 31, 2007, rather than the September 30, 2007 test year used in APS’ original filing. As a result of the updated filing, APS is requesting a net rate increase of $278.2 million for retail customers effective no later than October 1, 2009. As proposed by APS, the updated request would result in an average rate increase of 8.5% for existing customers plus the establishment of a new growth-related impact fee charged to new connections. A hearing on this case is scheduled to begin on April 2, 2009.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     The key financial provisions of the request include:

 	•	 	an increase of $264.3 million in non-fuel base rates and a net increase of $13.9 million for fuel and purchased power costs reflected in base rates, and recovery of up to $53 million of such increases through the impact fee;	
 		
 	•	 	a rate base of $5.4 billion, which approximates the ACC-jurisdictional portion of the book value of utility assets, net of accumulated depreciation and other credits, as of December 31, 2007, which includes certain adjustments, such as the inclusion of Units 5 and 6 of the Yucca Power Plant (near Yuma in southwestern Arizona), the steam generator replacement at Palo Verde Unit 3, environmental upgrades to APS coal plants, and other plant additions under construction at the end of the test year that are currently in service or expected to go into service before the proposed rates are requested to become effective;	
 		
 	•	 	the following proposed capital structure and costs of capital:	
 	 	 	 	 	 	 	 	 	
 	 	Capital	 	Cost of	
 	 	Structure	 	Capital	
Long-term debt	 	 	46.2	%	 	 	5.77	%	
Common stock equity	 	 	53.8	%	 	 	11.50	%	
Weighted-average cost of capital	 	 	 	 	 	 	8.86	%	

 	•	 	a Base Fuel Rate of $0.0388 per kWh based on estimated 2010 prices (an increase from the current Base Fuel Rate of $0.0325 per kWh, including the reclassification of $170 million of fuel and purchased power revenues from the PSA to base rates);	
 		
 	•	 	an attrition adjustment of $79.3 million to address erosion in APS’ earnings and return on equity through 2010; and	
 		
 	•	 	a new super-peak residential time-of-use rate and a commercial and industrial critical peak pricing proposal to allow eligible customers additional options to manage their electric bills, as well as other conservation-related rate design proposals.	
     The update also requests that the ACC adopt certain goals for APS to improve its financial strength, which include: allowing APS’ internal cash flow generation to cover its operating and capital costs of providing service; stabilizing and improving APS’ credit ratings; and providing a meaningful and ongoing opportunity for APS to achieve a reasonable return on the fair value of its property.
     In addition, APS requested various modifications to the Environmental Improvement Surcharge and the Demand Side Management Adjustment Clause that will allow APS to expand its conservation and demand-side management programs and support environmental upgrades to APS facilities in response to and in anticipation of future environmental requirements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      Motion for Approval of Interim Rate
     On June 6, 2008, APS filed with the ACC a motion in its currently pending retail rate case, requesting an interim base rate surcharge that would be subject to refund pending the final outcome of the rate case. The motion requested that the interim base rate surcharge of $0.003987 per kWh become effective upon the expiration of the $0.003987 per kWh 2007 PSA charge (the “2007 PSA Adjustor”), the latter of which remained in effect through the last billing cycle in July 2008. On June 30, 2008, APS submitted a proposed schedule to the ACC ALJ, with a goal to resolve the motion by November 2008, without otherwise changing the nature or amount of the request. The proposed procedural schedule was approved by the ACC ALJ on July 16, 2008, with a hearing scheduled to begin September 15, 2008. Rather than becoming effective upon the expiration of the 2007 PSA Adjustor, APS proposed that the interim rates, if approved, would be reflected in customer bills during the month of November when APS switches from summer to winter rates, which are generally lower than summer rates by an amount that is more than the requested interim relief.
     The purpose of the interim surcharge is to better position APS to fund customer-centered programs and needed infrastructure, access needed capital on reasonable terms, minimize the risk of credit rating downgrades by improving APS’ credit metrics until the ACC is able to grant permanent rate relief, allow APS to partially recover already incurred costs related to necessary capital expenditure programs to serve its customers, and provide a better opportunity for APS to achieve a return on equity closer to the level deemed reasonable and approved by the ACC in APS’ last rate case. The interim base rate surcharge would produce approximately $115 million in annual pretax retail revenues. APS cannot currently predict the outcome of this matter.
      2007 Retail Rate Order
     As previously disclosed, in June 2007 the ACC issued an order (the “Retail Rate Order”) in a general retail rate case that APS filed in late 2005. The Retail Rate Order approved a $322 million increase in APS’ annual retail base revenues, effective July 1, 2007, which included a $315 million fuel-related increase and a $7 million non-fuel related increase. The Retail Rate Order also authorized APS’ recovery of approximately $34 million of 2005 Deferrals through a temporary PSA surcharge over a twelve-month period beginning July 1, 2007, modified the PSA in various respects and increased the Base Fuel Rate. In addition, the Retail Rate Order provided that the 2007 PSA Adjustor, which took effect on February 1, 2007 and that was scheduled to expire on January 31, 2008, remain in effect as long as necessary to allow APS to collect $46 million of 2007 fuel and purchased power costs deferred as a result of the mid-2007 implementation of the new Base Fuel Rate. The 2007 PSA Adjustor expired as of the last billing cycle in July 2008.
      PSA Balance
     The following table shows the changes in the deferred fuel and purchased power regulatory asset for the six months ended June 30, 2008 and 2007 (dollars in millions):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	 	
 	 	June 30,	 	
 	 	2008	 	 	2007	 	
Beginning balance	 	$	111	 	 	$	160	 	
Deferred fuel and purchased power costs-current period	 	 	25	 	 	 	129	 	
Regulatory disallowance	 	 	—	 	 	 	(14	)	
Interest on deferred fuel and purchased power	 	 	1	 	 	 	3	 	
Amounts recovered through revenues	 	 	(114	)	 	 	(141	)	
 	 	 	 	 	 	 	
Ending balance	 	$	23	 	 	$	137	 	
 	 	 	 	 	 	 	
     The PSA rate for the PSA Year (February 1 through January 31) beginning February 1, 2008 was set at the maximum $0.004 per kWh. Any uncollected deferrals during the 2008 PSA Year resulting from this limit will be included in the historical component of the PSA rate for the PSA Year beginning February 1, 2009.
      Rate Request for a Formula Transmission Tariff
     On July 10, 2007, APS submitted a revised Open Access Transmission Tariff filing with the FERC to move from fixed rates to a formula rate-setting methodology in order to more accurately reflect the costs that APS incurs in providing transmission services. The originally requested formula rate, based on fiscal year 2006 data, proposed an estimated $37 million increase in annual transmission revenues, effective October 1, 2007. The proposed formula rate would be updated each year effective June 1 on the basis of APS’ actual cost of service, as disclosed in APS’ FERC Form 1 report for the previous fiscal year, and projected capital expenditures. Approximately $30 million of the originally requested increase represented charges for transmission services to serve APS’ retail customers (“Retail Transmission Charges”).
     On September 21, 2007, the FERC issued an order on the proposed revisions to APS’ transmission rates in which it accepted APS’ proposed formula rates and ordered settlement judge procedures. The proposed rates became effective March 1, 2008, subject to refund based upon the ultimate outcome of proceedings at the FERC on this matter.
     In order to recover the Retail Transmission Charges authorized by the FERC described above, on December 31, 2007, APS filed with the ACC an application to increase annual pretax retail revenues by approximately $30 million, effective March 1, 2008. This retail rate increase implemented an ACC-approved mechanism, the transmission cost adjustor (“TCA”), by which changes in Retail Transmission Charges can be reflected in APS’ retail rates. On February 13, 2008, the ACC voted to approve APS’ request, subject to refund pending final outcome of FERC proceedings on this matter.
     APS and intervening parties reached and filed a proposed settlement with the FERC on May 29, 2008 that contained some minor variations from the originally proposed formula method used for calculation of the rates. Through the proposed settlement, APS agreed to an initial increase of $28 million in annual transmission revenues, of which $27 million represents Retail Transmission Charges. Pursuant to the proposed settlement agreement, refund of any difference between the originally requested amount and the amount agreed to in the settlement will be netted against the next annual rate
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
change. On July 25, 2008, the FERC approved the rates and substance of the settlement through a conditional approval of the settlement, subject to the parties’ revision of a procedural provision.
     In addition, during the period of settlement discussions described above, APS filed calculations with the FERC, based on fiscal year 2007 data, which resulted in the automatic adjustment on June 1, 2008 of our transmission rates under the formula mechanism (as modified in accordance with the proposed settlement at that time). As a result, APS filed a new request with the ACC to allow APS to reflect the resulting increased Retail Transmission Charges in its retail rates through the TCA. On July 3, 2008, the ACC issued an order approving this request. These calculations produced an increase in annual transmission revenues of $15 million, of which $13 million represents Retail Transmission Charges. Also on July 3, 2008, the ACC agreed to follow the refund method contained in the settlement agreement by allowing for the refund of any difference between the originally requested amounts and the amounts resulting from the settlement to be netted against the next annual change in Retail Transmission Charges under the TCA.
      Equity Infusion Notice
     On May 2, 2008, Pinnacle West filed a notice with the ACC that would allow Pinnacle West to infuse up to $400 million of equity into APS in the event Pinnacle West deems it appropriate to do so to strengthen or maintain APS’ financial integrity. Under Arizona law and implementing regulatory decisions, Pinnacle West is required to give such notice at least 120 days prior to an equity infusion into APS that exceeds $150 million in a single calendar year. On July 2, 2008, the ACC staff recommended approval of the proposed infusion, and on July 29, 2008, the ACC voted to approve the recommended order which permits the infusion to occur on or before December 31, 2009.
Federal
      FERC Order
     On August 11, 2004, Pinnacle West, APS, Pinnacle West Energy, and APSES (collectively, the “Pinnacle West Companies”) submitted to the FERC an update to their three-year market-based rate review pursuant to the FERC’s order implementing a new generation market power analysis. On December 20, 2004, the FERC issued an order approving the Pinnacle West Companies’ market-based rates for control areas other than those of APS, Public Service Company of New Mexico (“PNM”) and Tucson Electric Power Company (“TEP”). The FERC staff required the Pinnacle West Companies to submit additional data with respect to these control areas, and the Pinnacle West Companies did so.
     On April 17, 2006, the FERC issued an order revoking the Pinnacle West Companies’ authority to make sales at market-based rates in the APS control area (the “April 17 Order”). The FERC found that the Pinnacle West Companies failed to provide the necessary information about the calculation of transmission imports into the APS control area to allow the FERC to make a determination regarding FERC’s generation market power “screens” in the APS control area. The FERC found that the Pinnacle West Companies may charge market-based rates in the PNM and TEP control areas.
     On August 13, 2007, the FERC issued an order on rehearing, reinstating the authority of the Pinnacle West Companies to make sales at market-based rates in all seasons for sales outside of the Phoenix Valley, and in all seasons except the summer for sales within the Phoenix Valley. The Pinnacle West Companies submitted a compliance filing implementing this order to the FERC on
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 12, 2007. This compliance filing was accepted conditionally by FERC in an order issued January 17, 2008. In compliance with the January 17, 2008 order, the Pinnacle West Companies filed a revised mitigation plan to implement cost-based rates for sales in the Phoenix Valley during the summer months. On May 30, 2008, the FERC issued a letter order accepting our mitigation plan. The first summer period under this cost-based mitigation began on June 1, 2008. This proceeding is now concluded.
6. Retirement Plans and Other Benefits
     Pinnacle West sponsors a qualified defined benefit and account balance pension plan, a nonqualified supplemental excess benefit retirement plan, and other postretirement benefit plans for the employees of Pinnacle West and our subsidiaries. Pinnacle West uses a December 31 measurement date for its pension and other postretirement benefit plans. The market-related value of our plan assets is their fair value at the measurement date.
     The following table provides details of the plans’ benefit costs for the three and six months ended June 30, 2008 and 2007. Also included is the portion of these costs charged to expense, including administrative costs and excluding amounts billed to electric plant participants or capitalized as overhead construction (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Pension Benefits	 	 	Other Benefits	 	
 	 	Three Months	 	 	Six Months	 	 	Three Months	 	 	Six Months	 	
 	 	Ended June 30,	 	 	Ended June 30,	 	 	Ended June 30,	 	 	Ended June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Service cost-benefits earned during the period	 	$	13	 	 	$	12	 	 	$	26	 	 	$	25	 	 	$	4	 	 	$	3	 	 	$	9	 	 	$	9	 	
Interest cost on benefit obligation	 	 	28	 	 	 	23	 	 	 	55	 	 	 	50	 	 	 	9	 	 	 	5	 	 	 	19	 	 	 	18	 	
Expected return on plan assets	 	 	(30	)	 	 	(25	)	 	 	(59	)	 	 	(53	)	 	 	(11	)	 	 	(6	)	 	 	(22	)	 	 	(21	)	
Amortization of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Transition obligation	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1	 	 	 	—	 	 	 	2	 	 	 	2	 	
Prior service cost	 	 	—	 	 	 	1	 	 	 	1	 	 	 	2	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Net actuarial loss	 	 	2	 	 	 	4	 	 	 	6	 	 	 	8	 	 	 	—	 	 	 	1	 	 	 	1	 	 	 	2	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net periodic benefit cost	 	$	13	 	 	$	15	 	 	$	29	 	 	$	32	 	 	$	3	 	 	$	3	 	 	$	9	 	 	$	10	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Portion of cost charged to expense	 	$	5	 	 	$	7	 	 	$	12	 	 	$	14	 	 	$	1	 	 	$	1	 	 	$	4	 	 	$	5	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
APS’ share of costs charged to expense	 	$	5	 	 	$	6	 	 	$	12	 	 	$	13	 	 	$	1	 	 	$	1	 	 	$	4	 	 	$	4	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Contributions
     The contribution to our pension plan in 2008 is estimated to be approximately $35 million. The contribution to our other postretirement benefit plans in 2008 is estimated to be approximately $20 million, of which $10 million has been contributed through August 2008. APS and other subsidiaries fund their share of the contributions. APS’ share is approximately 96% of the plans.
7. Business Segments
     Pinnacle West’s two reportable business segments are:
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 	•	 	our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities and includes electricity generation, transmission and distribution; and	
 		
 	•	 	our real estate segment, which consists of SunCor’s real estate development and investment activities.	
     Financial data for the three and six months ended June 30, 2008 and 2007 and at June 30, 2008 and December 31, 2007 is provided as follows (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Operating Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	829	 	 	$	712	 	 	$	1,452	 	 	$	1,248	 	
Real estate segment	 	 	37	 	 	 	48	 	 	 	85	 	 	 	125	 	
All other (a)	 	 	60	 	 	 	103	 	 	 	126	 	 	 	185	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	926	 	 	$	863	 	 	$	1,663	 	 	$	1,558	 	

Net Income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	121	 	 	$	71	 	 	$	114	 	 	$	74	 	
Real estate segment	 	 	15	 	 	 	—	 	 	 	14	 	 	 	10	 	
All other (a)	 	 	(2	)	 	 	8	 	 	 	1	 	 	 	12	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	134	 	 	$	79	 	 	$	129	 	 	$	96	 	

 	 	As of	 	 	As of	 	
 	 	June 30, 2008	 	 	December 31, 2007	 	
Assets:	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	10,863	 	 	$	10,356	 	
Real estate segment	 	 	577	 	 	 	661	 	
All other (a)	 	 	138	 	 	 	145	 	
 	 	 	 	 	 	 	
Total	 	$	11,578	 	 	$	11,162	 	

(a)	 	Includes activities related to marketing and trading, APSES and El Dorado. None of these segments is a reportable segment.	
      8. Income Taxes
     As a result of a change in IRS guidance, we previously claimed a tax deduction related to an APS tax accounting method change on our 2001 federal consolidated income tax return. The accelerated deduction resulted in a $200 million reduction in the current income tax liability and a corresponding increase in the plant-related deferred tax liability on our 2002 financial statements. Our 2001 return was the subject of an IRS review and the IRS finalized its examination in the second quarter of 2008, which included a settlement on the tax accounting method change and favorable
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
resolution of other various tax matters. As a result of this settlement and the lapse of federal statutes prior to 2004, we recognized income tax benefits of approximately $30 million in the second quarter of 2008, including approximately $23 million related to interest. Additionally, the settlement and lapse of federal statutes resulted in a net decrease in uncertain tax positions of $115 million through June 30, 2008.
     As of June 30, 2008, the tax year ended December 31, 2004 and all subsequent tax years remain subject to examination by the IRS. With few exceptions, we are no longer subject to state income tax examinations by tax authorities for years before 1999.
9. Variable-Interest Entities
     In 1986, APS entered into agreements with three separate VIE lessors in order to sell and lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in accordance with GAAP. We are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate them.
     APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assume the debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as of June 30, 2008, APS would have been required to assume approximately $188 million of debt and pay the equity participants approximately $169 million.
10. Derivative and Energy Trading Accounting
     We use derivative instruments (primarily forward purchases and sales, swaps, options and futures) to manage our exposure to the commodity price risk inherent in the purchase and sale of fuel, electricity and emission allowances and credits. As of June 30, 2008, we hedged exposures to the price variability of the power and gas commodities for a maximum of 39 months. The changes in market value of such contracts have a high correlation to price changes in the hedged transactions.
Cash Flow Hedges
     The changes in the fair value of our hedged positions included in the Condensed Consolidated Statements of Income, after consideration of amounts deferred under the PSA, for the three and six months ended June 30, 2008 and 2007 are comprised of the following (dollars in thousands):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2008	 	2007	 	2008	 	2007	
Gains on the ineffective portion of derivatives qualifying for hedge accounting	 	$	1,315	 	 	$	422	 	 	$	2,405	 	 	$	1,333	 	
Gains from the discontinuance of cash flow hedges	 	 	—	 	 	 	—	 	 	 	—	 	 	 	314	 	
     During the next twelve months ending June 30, 2009, we estimate that a net gain of $182 million before income taxes will be reclassified from accumulated other comprehensive income as an offset to the effect of market price changes for the related hedged transactions. To the extent the gains are eligible for inclusion in the PSA, the amounts will be recorded as either a regulatory asset or liability and have no effect on earnings.
FIN 39-1
     We adopted FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts” (FIN 39-1), on January 1, 2008. In accordance with this guidance, we elected to offset the fair value amounts for derivative instruments, including collateral, executed with the same counterparty under a master netting arrangement. Collateral was previously reported in other current assets or other current liabilities on our Condensed Consolidated Balance Sheets. This guidance required retrospective application for all prior periods presented. As a result, our Condensed Consolidated Balance Sheet and Statement of Cash Flows line items changed by the following amounts (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As originally	 	Reclassifications	 	 	
 	 	reported in the	 	as a result of the	 	 	
 	 	2007	 	adoption of	 	After adoption of	
Balance Sheet — December 31, 2007	 	Form 10-K	 	FIN 39-1	 	FIN 39-1	
Current Assets — Assets from risk management and trading activities	 	$	97,373	 	 	$	(39,768	)	 	$	57,605	 	
Current Assets — Other current assets	 	 	34,738	 	 	 	(750	)	 	 	33,988	 	
Investments and Other Assets — Assets from long-term risk management and trading activities	 	 	89,913	 	 	 	(40,985	)	 	 	48,928	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Current Liabilities — Liabilities from risk management and trading activities	 	 	65,028	 	 	 	(40,518	)	 	 	24,510	 	
Deferred Credits and Other - Liabilities from long-term risk management and trading activities	 	 	45,686	 	 	 	(40,985	)	 	 	4,701	 	
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As originally	 	Reclassifications	 	 	
 	 	reported in the	 	as a result of the	 	 	
Statement of Cash Flows —	 	June 30, 2007	 	adoption of	 	After adoption of	
Six months ended June 30, 2007	 	Form 10-Q	 	FIN 39-1	 	FIN 39-1	
Change in margin and collateral accounts(a)	 	$	11,029	 	 	$	(67,575	)	 	$	(56,546	)	
Change in risk management and trading — liabilities	 	 	15,883	 	 	 	20,872	 	 	 	36,755	(b)	
Collateral	 	 	(46,703	)	 	 	46,703	 	 	 	—	 	

(a)	 	Previously referred to as “Change in risk management and trading — assets” in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.	
 		
(b)	 	Risk management and trading — liabilities are netted with other long-term liabilities on the Condensed Consolidated Statement of Cash Flows.	
     The following tables summarize our assets and liabilities from risk management and trading activities presented net in accordance with FIN 39-1 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Investments	 	 	 	 	 	 	Deferred	 	 	 	 	
 	 	Current	 	 	and Other	 	 	Current	 	 	Credits and	 	 	Net Asset	 	
June 30, 2008	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	(Liability)	 	
Mark-to-market	 	$	353,722	 	 	$	303,089	 	 	$	(58,189	)	 	$	(29,719	)	 	$	568,903	 	
Margin account	 	 	(138,349	)	 	 	1,141	 	 	 	—	 	 	 	—	 	 	 	(137,208	)	
Collateral provided to counterparties	 	 	1,800	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,800	 	
Collateral provided from counterparties	 	 	(63,770	)	 	 	(20,849	)	 	 	—	 	 	 	—	 	 	 	(84,619	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	153,403	 	 	$	283,381	 	 	$	(58,189	)	 	$	(29,719	)	 	$	348,876	 	

 	 	 	 	 	 	Investments	 	 	 	 	 	 	Deferred	 	 	 	 	
 	 	Current	 	 	and Other	 	 	Current	 	 	Credits and	 	 	 	 	
December 31, 2007	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	Net Asset	 	
Mark-to-market	 	$	26,333	 	 	$	48,928	 	 	$	(30,786	)	 	$	(4,701	)	 	$	39,774	 	
Margin account	 	 	30,650	 	 	 	—	 	 	 	6,148	 	 	 	—	 	 	 	36,798	 	
Collateral provided to counterparties	 	 	622	 	 	 	—	 	 	 	128	 	 	 	—	 	 	 	750	 	
Collateral provided from counterparties	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	57,605	 	 	$	48,928	 	 	$	(24,510	)	 	$	(4,701	)	 	$	77,322	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     We maintain a margin account with a broker to support our risk management and trading activities. Cash is deposited with the broker in this account at the time futures or options contracts are initiated. The change in market value of these contracts (reflected in mark-to-market) requires adjustment of the margin account balance.
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     See Note 20 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted January 1, 2008.
Credit Risk
     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We have risk management and trading contracts with many counterparties, including one counterparty for which a worst case exposure represents approximately 10% of Pinnacle West’s $437 million of risk management and trading assets as of June 30, 2008. Our risk management process assesses and monitors the financial exposure of this and all other counterparties. Despite the fact that the great majority of trading counterparties’ securities are rated as investment grade by the credit rating agencies, including the counterparty discussed above, there is still a possibility that one or more of these companies could default, resulting in a material impact on consolidated earnings for a given period. Counterparties in the portfolio consist principally of financial institutions, major energy companies, municipalities and local distribution companies. We maintain credit policies that we believe minimize overall credit risk to within acceptable limits. Determination of the credit quality of our counterparties is based upon a number of factors, including credit ratings and our evaluation of their financial condition. To manage credit risk, we employ collateral requirements, standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty and credit default swaps. Valuation adjustments are established representing our estimated credit losses on our overall exposure to counterparties.
11. Comprehensive Income
     Components of comprehensive income for the three and six months ended June 30, 2008 and 2007 are as follows (dollars in thousands):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months	 	 	Six Months	 	
 	 	Ended June 30,	 	 	Ended June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Net income	 	$	133,862	 	 	$	78,994	 	 	$	129,389	 	 	$	95,524	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized gains (losses) on derivative instruments (a)	 	 	240,986	 	 	 	(32,880	)	 	 	360,792	 	 	 	29,680	 	
Net reclassification of realized gains to income (b)	 	 	(36,705	)	 	 	(14,049	)	 	 	(38,771	)	 	 	(19,061	)	
Net unrealized losses related to pension and other postretirement benefits (c)	 	 	(10,595	)	 	 	(44,573	)	 	 	(10,595	)	 	 	(44,573	)	
Reclassification of pension and other postretirement benefits to income	 	 	1,304	 	 	 	228	 	 	 	2,347	 	 	 	479	 	
Income tax benefit (expense) related to items of other comprehensive income	 	 	(76,344	)	 	 	35,724	 	 	 	(122,825	)	 	 	13,154	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other comprehensive income (loss)	 	 	118,646	 	 	 	(55,550	)	 	 	190,948	 	 	 	(20,321	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	$	252,508	 	 	$	23,444	 	 	$	320,337	 	 	$	75,203	 	

(a)	 	These amounts primarily include unrealized gains and losses on contracts used to hedge our forecasted electricity and natural gas requirements to serve Native Load. These changes are primarily due to changes in forward natural gas prices and wholesale electricity prices.	

(b)	 	These amounts primarily include the reclassification of unrealized gains and losses to realized for contracted commodities delivered during the period.	

(c)	 	In accordance with the ACC’s June 28, 2007 order in APS’ general rate case, these amounts primarily include costs that were recorded previously as a regulatory asset and have now been charged to other comprehensive income.	
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12. Commitments and Contingencies
Palo Verde Nuclear Generating Station
      Spent Nuclear Fuel and Waste Disposal
     Nuclear power plant operators are required to enter into spent fuel disposal contracts with the DOE, and the DOE is required to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste Policy Act required the DOE to develop a permanent repository for the storage and disposal of spent nuclear fuel by 1998, the DOE has announced that the repository cannot be completed before at least 2017. In November 1997, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued a decision preventing the DOE from excusing its own delay, but refused to order the DOE to begin accepting spent nuclear fuel. Based on this decision and the DOE’s delay, a number of utilities, including APS (on behalf of itself and the other Palo Verde owners), filed damages actions against the DOE in the Court of Federal Claims. APS is currently pursuing that damages claim and trial is expected to occur in 2009.
     APS currently estimates it will incur $132 million (in 2008 dollars) over the life of Palo Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel. At June 30, 2008, APS had a regulatory liability of $17 million that represents amounts recovered in retail rates in excess of amounts spent for on-site interim spent fuel storage.
California Energy Market Issues and Refunds in the Pacific Northwest
      FERC
     In July 2001, the FERC ordered an expedited fact-finding hearing to calculate refunds for spot market transactions in California during a specified time frame. APS was a seller and a purchaser in the California markets at issue and, to the extent that refunds are ordered, APS should be a recipient as well as a payor of such amounts. In addition, on March 19, 2002, the State of California filed a complaint with the FERC alleging that wholesale sellers of power and energy, including APS, failed to properly file rate information at the FERC in connection with sales to California from 2000 to March 2002 under market-based rates. Since 2004, the Ninth Circuit and the FERC have issued various decisions and orders involving the aforementioned issues, including decisions related to: entities subject to FERC jurisdiction and, therefore, potentially owing refunds; applicable refund methodologies; the temporal scope and types of transactions that are properly subject to the refund orders; and the appropriate standard of review at the FERC on wholesale power contracts in the refund proceedings. A settlement, resolving APS’ issues with certain California parties for the current refund period, was approved by the FERC in an order issued on June 30, 2008. The resolution of the claims related to the parties involved in this settlement had no material adverse impact on our financial position, results of operations or cash flows. We currently believe the refund claims at the FERC related to the parties not involved in this settlement will have no material adverse impact on our financial position, results of operations or cash flows.
     On March 26, 2003, the FERC made public a Final Report on Price Manipulation in Western Markets, prepared by its staff and covering spot markets in the West in 2000 and 2001. The report
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stated that a significant number of entities who participated in the California markets during the 2000-2001 time period, including APS, may potentially have been involved in arbitrage transactions that allegedly violated certain provisions of the Independent System Operator tariff. After reviewing the matter, along with the data supplied by APS, the FERC staff moved to dismiss the claims against APS and to dismiss the proceeding. The motion to dismiss was granted by the FERC on January 22, 2004. Certain parties sought rehearing of this order; however, under the settlement agreement mentioned above, these parties withdrew their request for rehearing on July 22, 2008.
     On July 25, 2001, the FERC also ordered an evidentiary proceeding to discuss and evaluate possible refunds for wholesale sales in the Pacific Northwest. The FERC affirmed the ALJ’s conclusion that the prices in the Pacific Northwest were not unreasonable or unjust and refunds should not be ordered in this proceeding. This decision was appealed to the U.S. Court of Appeals for the Ninth Circuit. On August 24, 2007, the Ninth Circuit issued an opinion that remanded the proceeding to the FERC for further consideration. Petitions for rehearing of this opinion were filed. Although the FERC has not yet determined whether any refunds will ultimately be required, we do not expect that the resolution of these issues will have a material adverse impact on our financial position, results of operations or cash flows.
Navajo Nation Litigation
     In June 1999, the Navajo Nation served Salt River Project with a lawsuit filed in the United States District Court for the District of Columbia (the “D.C. Lawsuit”) naming Salt River Project, several Peabody Coal Company entities (collectively, “Peabody”), Southern California Edison Company and other defendants, and citing various claims in connection with the renegotiations of the coal royalty and lease agreements under which Peabody mines coal for the Navajo Generating Station and the Mohave Generating Station. APS is a 14% owner of the Navajo Generating Station, which Salt River Project operates. The D.C. Lawsuit alleges, among other things, that the defendants obtained a favorable coal royalty rate by improperly influencing the outcome of a federal administrative process under which the royalty rate was to be adjusted. The suit seeks $600 million in damages, treble damages, punitive damages of not less than $1 billion, and the ejection of defendants “from all possessory interests and Navajo Tribal lands arising out of the [primary coal lease].” In July 2001, the court dismissed all claims against Salt River Project.
     In January 2005, Peabody served APS with a lawsuit filed in the Circuit Court for the City of St. Louis naming APS and the other Navajo Generating Station participants and seeking, among other things, a declaration that the participants “are obligated to reimburse Peabody for any royalty, tax, or other obligation arising out of the D.C. Lawsuit.” Based on APS’ ownership interest in the Navajo Generating Station, APS could be liable for up to 14% of any such obligation. On July 10, 2008, Peabody agreed to dismiss this litigation without prejudice. APS cannot currently predict whether the lawsuit will be refiled based upon the final outcome of the D.C. Lawsuit.
Superfund
     Superfund establishes liability for the cleanup of hazardous substances found contaminating the soil, water or air. Those who generated, transported or disposed of hazardous substances at a contaminated site are among those who are PRPs. PRPs may be strictly, and often jointly and severally, liable for clean-up. On September 3, 2003, the EPA advised APS that the EPA considers
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APS to be a PRP in the Motorola 52 nd Street Superfund Site, Operable Unit 3 (OU3) in Phoenix, Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West have agreed with the EPA to perform certain investigative activities of the APS facilities within OU3. Because the investigation has not yet been completed and ultimate remediation requirements are not yet finalized, at the present time neither APS nor Pinnacle West can accurately estimate the expenditures that may be required.
Salt River Project
     Salt River Project has notified APS that Salt River Project allegedly failed to bill APS for (a) energy losses under certain service schedules of a power contract between the parties and (b) certain other charges under the contract. Salt River Project asserts that certain of these failures to bill APS for such losses and charges may extend back to 1996 and, as a result, claims that APS owes it approximately $29 million. APS disputes that it is required to pay these amounts. No lawsuit or litigation has been initiated in the matter at this time. We do not expect that resolution of this matter will have a material adverse impact on our financial position, results of operations, or cash flows.
Litigation
     We are party to various other claims, legal actions and complaints arising in the ordinary course of business, including but not limited to environmental matters related to the Clean Air Act, Navajo Nation issues and EPA and ADEQ issues. In our opinion, the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.
13. Nuclear Insurance
     The Palo Verde participants have insurance for public liability resulting from nuclear energy hazards to the full limit of liability under federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $300 million and the balance by an industry-wide retrospective assessment program. If losses at any nuclear power plant covered by the program exceed the accumulated funds, APS could be assessed retrospective premium adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $101 million, subject to an annual limit of $15 million per incident, to be periodically adjusted for inflation. Based on APS’ interest in the three Palo Verde units, APS’ maximum potential assessment per incident for all three units is approximately $88 million, with an annual payment limitation of approximately $13 million.
     The Palo Verde participants maintain “all risk” (including nuclear hazards) insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. APS has also secured insurance against portions of any increased cost of generation or purchased power and business interruption resulting from a sudden and unforeseen accidental outage of any of the three units. The property damage, decontamination, and replacement power coverages are provided by Nuclear Electric Insurance Limited (NEIL). APS is subject to retrospective assessments under all NEIL policies if NEIL’s losses in any policy year exceed accumulated funds. The maximum amount of retrospective assessments APS could incur under the current NEIL policies totals $20.8 million.
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     The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions and exclusions.
14. Other Income and Other Expense
     The following table provides detail of other income and other expense for the three and six months ended June 30, 2008 and 2007 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Other income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	3,233	 	 	$	1,950	 	 	$	5,476	 	 	$	5,362	 	
Investment gains — net	 	 	—	 	 	 	2,681	 	 	 	—	 	 	 	942	 	
SunCor other income (a)	 	 	42	 	 	 	778	 	 	 	1,638	 	 	 	1,358	 	
Miscellaneous	 	 	653	 	 	 	460	 	 	 	662	 	 	 	980	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income	 	$	3,928	 	 	$	5,869	 	 	$	7,776	 	 	$	8,642	 	

Other expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-operating costs	 	$	(3,594	)	 	$	(2,344	)	 	$	(5,524	)	 	$	(5,655	)	
Investment losses — net	 	 	(5,540	)	 	 	—	 	 	 	(8,208	)	 	 	—	 	
Miscellaneous	 	 	(929	)	 	 	(925	)	 	 	(1,239	)	 	 	(2,228	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other expense	 	$	(10,063	)	 	$	(3,269	)	 	$	(14,971	)	 	$	(7,883	)	

(a)	 	Includes equity earnings from a real estate joint venture that is a pass-through entity for tax purposes.	
15. Guarantees
     We have issued parental guarantees and letters of credit and obtained surety bonds on behalf of our subsidiaries. Our parental guarantees for Pinnacle West Marketing & Trading and APS relate to commodity energy products. Our credit support instruments enable APSES to offer energy-related products and commodity energy. Non-performance or non-payment under the original contract by our subsidiaries would require performance under the guarantee or surety bond. No liability is currently recorded on the Condensed Consolidated Balance Sheets related to Pinnacle West’s current outstanding guarantees on behalf of our subsidiaries. Our guarantees have no recourse or collateral provisions to allow us to recover amounts paid under the guarantees. The amounts and approximate terms of our guarantees and surety bonds for each subsidiary at June 30, 2008 are as follows (dollars in millions):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Guarantees	 	 	Surety Bonds	 	
 	 	 	 	 	 	Term	 	 	 	 	 	 	Term	 	
 	 	Amount	 	 	(in years)	 	 	Amount	 	 	(in years)	 	
Parental:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West Marketing & Trading	 	$	12	 	 	 	1	 	 	$	—	 	 	 	—	 	
APSES	 	 	18	 	 	 	1	 	 	 	11	 	 	 	1	 	
APS	 	 	4	 	 	 	1	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	34	 	 	 	 	 	 	$	11	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     At June 30, 2008, Pinnacle West had approximately $7 million of letters of credit related to workers’ compensation expiring in 2009. We intend to provide from either existing or new facilities for the extension, renewal or substitution of the letters of credit to the extent required.
     APS has entered into various agreements that require letters of credit for financial assurance purposes. At June 30, 2008, approximately $200 million of letters of credit were outstanding to support existing pollution control bonds of approximately $200 million. The letters of credit are available to fund the payment of principal and interest on such debt obligations and expire in 2010. APS has also entered into approximately $79 million of letters of credit to support certain equity lessors in the Palo Verde sale leaseback transactions (see Note 9 for further details on the Palo Verde sale leaseback transactions). These letters of credit expire in 2010. Additionally, at June 30, 2008, APS had approximately $4 million of letters of credit related to counterparty collateral requirements expiring in 2008. APS intends to provide from either existing or new facilities for the extension, renewal or substitution of the letters of credit to the extent required.
     We enter into agreements that include indemnification provisions relating to liabilities arising from or related to certain of our agreements; most significantly, APS has agreed to indemnify the equity participants and other parties in the Palo Verde sale leaseback transactions with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in the indemnification provisions and, therefore, the overall maximum amount of the obligation under such indemnification provisions cannot be reasonably estimated. Based on historical experience and evaluation of the specific indemnities, we do not believe that any material loss related to such indemnification provisions is likely.
16. Earnings Per Share
     The following table presents earnings per weighted average common share outstanding for the three and six months ended June 30, 2008 and 2007:
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Basic earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	1.14	 	 	$	0.79	 	 	$	1.09	 	 	$	0.96	 	
Income (loss) from discontinued operations	 	 	0.19	 	 	 	—	 	 	 	0.20	 	 	 	(0.01	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per share — basic	 	$	1.33	 	 	$	0.79	 	 	$	1.29	 	 	$	0.95	 	

Diluted earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	1.13	 	 	$	0.79	 	 	$	1.09	 	 	$	0.95	 	
Income (loss) from discontinued operations	 	 	0.20	 	 	 	(0.01	)	 	 	0.19	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per share — diluted	 	$	1.33	 	 	$	0.78	 	 	$	1.28	 	 	$	0.95	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     Dilutive stock options and performance shares (which are contingently issuable) increased average common shares outstanding by approximately 264,000 shares and 550,000 shares for the three months ended June 30, 2008 and June 30, 2007 respectively, and by approximately 269,000 shares and 580,000 shares for the six months ended June 30, 2008 and 2007 respectively.
     Options to purchase 713,291 shares of common stock for the three-month period and 688,167 shares for the six-month period ended June 30, 2008 were outstanding but were excluded from the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. Options to purchase shares of common stock that were excluded from the computation of diluted earnings per share for that same reason were 113,250 shares for the three-month period ended June 30, 2007. There were no such options outstanding for the six-month period ended June 30, 2007.
17. Discontinued Operations
     SunCor (real estate segment) - In 2008 and 2007, SunCor sold or expects to sell commercial properties that are required to be reported as discontinued operations on Pinnacle West’s Condensed Consolidated Statements of Income in accordance with SFAS No. 144. The following table contains SunCor’s revenue, income before income taxes and income after income taxes classified as discontinued operations on Pinnacle West’s Condensed Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	 	 	 	Six Months Ended	
 	 	June 30,	 	 	 	 	 	June 30,	
 	 	2008	 	2007	 	 	 	 	 	2008	 	2007	
Revenue	 	$	—	 	 	$ 1	 	 	 	 	 	$	—	 	 	$	3	 	
Income before income taxes	 	 	32	 	 	—	 	 		 	 	 	32	 	 	—	
Income after income taxes	 	 	20	 	 	—	 	 	 	 	 	 	20	 	 	—	
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
18. Nuclear Decommissioning Trust
     To fund the costs APS expects to incur to decommission Palo Verde, APS established external decommissioning trusts in accordance with NRC regulations. APS invests the trust funds in fixed income securities and domestic equity securities. APS applies the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” in accounting for investments in decommissioning trust funds, and classifies these investments as available for sale. As a result, we record the decommissioning trust funds at their fair value on our Condensed Consolidated Balance Sheets. Because of the ability of APS to recover decommissioning costs in rates and in accordance with the regulatory treatment for decommissioning trust funds, we have recorded the offsetting amount of gains (losses) on investment securities in other regulatory liabilities or assets . The following table summarizes the fair value of APS’ nuclear decommissioning trust fund assets at June 30, 2008 and December 31, 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Trust Fund	 	 	Total Unrealized	 	
 	 	Assets	 	 	Gains	 	
June 30, 2008	 	 	 	 	 	 	 	 	
Equity securities — fair value	 	$	154	 	 	$	47	 	
Fixed income securities — fair value	 	 	215	 	 	 	3	 	
 	 	 	 	 	 	 	
Total	 	$	369	 	 	$	50	 	

December 31, 2007	 	 	 	 	 	 	 	 	
Equity securities — fair value	 	$	175	 	 	$	68	 	
Fixed income securities — fair value	 	 	204	 	 	 	5	 	
 	 	 	 	 	 	 	
Total	 	$	379	 	 	$	73	 	
 	 	 	 	 	 	 	
     The costs of securities sold are determined on the basis of specific identification. The following table sets forth approximate gains and losses and proceeds from the sale of securities by the nuclear decommissioning trust funds (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2008	 	2007	 	2008	 	2007	
Realized gains	 	$	1	 	 	$	1	 	 	$	2	 	 	$	2	 	
Realized losses	 	 	(1	)	 	 	(1	)	 	 	(2	)	 	 	(3	)	
Proceeds from the sale of securities	 	 	121	 	 	 	70	 	 	 	188	 	 	 	133	 	
     The fair value of fixed income securities, summarized by contractual maturities, at June 30, 2008 is as follows (dollars in millions):
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	
Fair Value	 	June 30, 2008	 	
Less than one year	 	$	13	 	
1 year — 5 years	 	 	37	 	
5 years — 10 years	 	 	45	 	
Greater than 10 years	 	 	120	 	
 	 	 	 	
Total	 	$	215	 	
 	 	 	 	
     See Note 20 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted January 1, 2008.
19. New Accounting Standards
     See Note 20 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted January 1, 2008.
     See Notes 10 and S-1 for discussions of FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts” (FIN 39-1), which we adopted January 1, 2008.
     SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” was effective for us on January 1, 2008. This guidance provides companies with an option to report selected financial assets and liabilities at fair value. We did not elect the fair value option for any of our financial assets or liabilities. Therefore, SFAS No. 159 did not have an impact on our financial statements.
     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This guidance requires enhanced disclosures about derivative instruments and hedging activities. The Statement is effective for us on January 1, 2009. We are currently evaluating this new guidance but do not expect it to have a material impact on our financial statements.
20. Fair Value Measurements
     We adopted SFAS No. 157, “Fair Value Measurements,” on January 1, 2008. This new standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. We apply fair value measurements to derivative instruments and nuclear decommissioning trust assets. The adoption of SFAS No. 157 did not have a material impact on our financial statements.
     SFAS No. 157 requires companies to disclose the fair value of certain assets and liabilities according to a fair value hierarchy. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories. The three levels of the fair value hierarchy are:

 	•	 	Level 1 — quoted prices in active markets for identical assets or liabilities.	
 		
 	•	 	Level 2 — quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable.	
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 	•	 	Level 3 – model-derived valuations with unobservable inputs that are supported by little or no market activity.	
     As required by SFAS No. 157, assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The following table presents the fair value at June 30, 2008 of our assets and liabilities that are measured at fair value on a recurring basis for both Pinnacle West Consolidated and APS (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  	 	Quoted Prices	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	in Active	 	 	Significant	 	 	 	 	 	 	 	 	 	 	 	
 	 	Markets for	 	 	Other	 	 	Significant	 	 	 	 	 	 	 	 	
 	 	Identical	 	 	Observable	 	 	Unobservable	 	 	 	 	 	 	Balance at	 	
 	 	Assets	 	 	Inputs	 	 	Inputs	 	 	Counterparty	 	 	June 30,	 	
Pinnacle West:	 	(Level 1)	 	 	(Level 2)	 	 	(Level 3)	 	 	Netting	 	 	2008	 	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Risk management and trading activities (a)	 	$	239	 	 	$	563	 	 	$	72	 	 	$	(217	)	 	$	657	 	
Nuclear decommissioning trust	 	 	33	 	 	 	336	 	 	 	—	 	 	 	—	 	 	 	369	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	272	 	 	$	899	 	 	$	72	 	 	$	(217	)	 	$	1,026	 	

Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Risk management and trading activities (a)	 	$	(65	)	 	$	(175	)	 	$	(65	)	 	$	217	 	 	$	(88	)	

APS:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Risk management and trading activities (a)	 	$	239	 	 	$	515	 	 	$	72	 	 	$	(208	)	 	$	618	 	
Nuclear decommissioning trust	 	 	33	 	 	 	336	 	 	 	—	 	 	 	—	 	 	 	369	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	272	 	 	$	851	 	 	$	72	 	 	$	(208	)	 	$	987	 	

Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Risk management and trading activities (a)	 	$	(65	)	 	$	(149	)	 	$	(65	)	 	$	208	 	 	$	(71	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(a)	 	Excludes $137 million of margin account liability and net collateral of $83 million. See Notes 10 and S-1.	
     The following table shows the changes in fair value for assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the three and six months ended June 30, 2008 for Pinnacle West Consolidated (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30, 2008	 	 	June 30, 2008	 	
Net derivative asset balance at beginning of period	 	$	7	 	 	$	8	 	
Total net gains (losses) realized/ unrealized:	 	 	 	 	 	 	 	 	
Included in earnings	 	 	(17	)	 	 	(19	)	
Included in OCI	 	 	11	 	 	 	13	 	
Deferred as a regulatory asset or liability	 	 	(2	)	 	 	(5	)	
Purchases, issuances, and settlements	 	 	—	 	 	 	—	 	
Transfers into Level 3(a)	 	 	8	 	 	 	10	 	
 	 	 	 	 	 	 	
Net derivative asset balance at end of period	 	$	7	 	 	$	7	 	

Net unrealized losses included in earnings related to instruments still held as of June 30, 2008	 	$	16	 	 	$	18	 	

(a)	 	Transfers reflect fair value as of the beginning of the quarter.	
     The following table shows the changes in fair value for assets and liabilities that are measured at fair value on a recurring basis using Level 3 inputs for the three and six months ended June 30, 2008 for APS (dollars in millions):
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30, 2008	 	 	June 30, 2008	 	
Net derivative asset (liability) balance at beginning of period	 	$	—	 	 	$	1	 	
Total net gains (losses) realized/ unrealized:	 	 	 	 	 	 	 	 	
Included in earnings	 	 	(17	)	 	 	(19	)	
Included in OCI	 	 	11	 	 	 	13	 	
Deferred as a regulatory asset or liability	 	 	(2	)	 	 	(5	)	
Purchases, issuances, and settlements	 	 	—	 	 	 	—	 	
Transfers into Level 3(a)	 	 	15	 	 	 	17	 	
 	 	 	 	 	 	 	
Net derivative asset balance at end of period	 	$	7	 	 	$	7	 	

Net unrealized losses included in earnings related to instruments still held as of June 30, 2008	 	$	26	 	 	$	29	 	

(a)	 	Transfers reflect fair market value as of the beginning of the quarter.	
     We did not have any non-recurring fair value measurements during the quarter that required disclosure.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	June 30,	 	
 	 	2008	 	 	2007	 	
ELECTRIC OPERATING REVENUES	 	$	831,083	 	 	$	721,759	 	
 	 	 	 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	 	 	 	
Fuel and purchased power	 	 	329,077	 	 	 	273,406	 	
Operations and maintenance	 	 	187,819	 	 	 	170,631	 	
Depreciation and amortization	 	 	95,961	 	 	 	90,809	 	
Income taxes	 	 	21,553	 	 	 	42,682	 	
Other taxes	 	 	32,813	 	 	 	34,588	 	
 	 	 	 	 	 	 	
Total	 	 	667,223	 	 	 	612,116	 	
 	 	 	 	 	 	 	
OPERATING INCOME	 	 	163,860	 	 	 	109,643	 	

OTHER INCOME (DEDUCTIONS)	 	 	 	 	 	 	 	 	
Income taxes	 	 	1,839	 	 	 	(399	)	
Allowance for equity funds used during construction	 	 	5,414	 	 	 	5,195	 	
Other income (Note S-3)	 	 	1,034	 	 	 	4,356	 	
Other expense (Note S-3)	 	 	(6,200	)	 	 	(2,769	)	
 	 	 	 	 	 	 	
Total	 	 	2,087	 	 	 	6,383	 	

INTEREST DEDUCTIONS	 	 	 	 	 	 	 	 	
Interest on long-term debt	 	 	40,719	 	 	 	40,400	 	
Interest on short-term borrowings	 	 	2,519	 	 	 	2,052	 	
Debt discount, premium and expense	 	 	1,160	 	 	 	1,159	 	
Allowance for borrowed funds used during construction	 	 	(3,833	)	 	 	(2,675	)	
 	 	 	 	 	 	 	
Total	 	 	40,565	 	 	 	40,936	 	

NET INCOME	 	$	125,382	 	 	$	75,090	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	 	
 	 	June 30,	 	
 	 	2008	 	 	2007	 	
ELECTRIC OPERATING REVENUES	 	$	1,456,659	 	 	$	1,260,019	 	
 	 	 	 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	 	 	 	
Fuel and purchased power	 	 	601,130	 	 	 	479,602	 	
Operations and maintenance	 	 	375,954	 	 	 	336,565	 	
Depreciation and amortization	 	 	189,846	 	 	 	178,685	 	
Income taxes	 	 	26,710	 	 	 	45,825	 	
Other taxes	 	 	65,531	 	 	 	69,110	 	
 	 	 	 	 	 	 	
Total	 	 	1,259,171	 	 	 	1,109,787	 	
 	 	 	 	 	 	 	
OPERATING INCOME	 	 	197,488	 	 	 	150,232	 	

OTHER INCOME (DEDUCTIONS)	 	 	 	 	 	 	 	 	
Income taxes	 	 	2,954	 	 	 	355	 	
Allowance for equity funds used during construction	 	 	11,538	 	 	 	9,639	 	
Other income (Note S-3)	 	 	3,098	 	 	 	8,789	 	
Other expense (Note S-3)	 	 	(12,088	)	 	 	(7,673	)	
 	 	 	 	 	 	 	
Total	 	 	5,502	 	 	 	11,110	 	

INTEREST DEDUCTIONS	 	 	 	 	 	 	 	 	
Interest on long-term debt	 	 	82,892	 	 	 	80,475	 	
Interest on short-term borrowings	 	 	6,368	 	 	 	4,033	 	
Debt discount, premium and expense	 	 	2,320	 	 	 	2,315	 	
Allowance for borrowed funds used during construction	 	 	(7,608	)	 	 	(4,888	)	
 	 	 	 	 	 	 	
Total	 	 	83,972	 	 	 	81,935	 	

NET INCOME	 	$	119,018	 	 	$	79,407	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	June 30,	 	 	December 31,	 	
 	 	2008	 	 	2007	 	
ASSETS	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
UTILITY PLANT	 	 	 	 	 	 	 	 	
Electric plant in service and held for future use	 	$	11,971,164	 	 	$	11,582,862	 	
Less accumulated depreciation and amortization	 	 	4,046,556	 	 	 	3,994,777	 	
 	 	 	 	 	 	 	
Net	 	 	7,924,608	 	 	 	7,588,085	 	
 	 	 	 	 	 	 	 	 	
Construction work in progress	 	 	492,531	 	 	 	622,693	 	
Intangible assets, net of accumulated amortization	 	 	101,817	 	 	 	105,225	 	
Nuclear fuel, net of accumulated amortization	 	 	97,730	 	 	 	69,271	 	
 	 	 	 	 	 	 	
Total utility plant	 	 	8,616,686	 	 	 	8,385,274	 	

INVESTMENTS AND OTHER ASSETS	 	 	 	 	 	 	 	 	
Nuclear decommissioning trust (Note 18)	 	 	369,473	 	 	 	379,347	 	
Assets from long-term risk management and trading activities (Note S-1)	 	 	282,291	 	 	 	41,603	 	
Other assets	 	 	67,593	 	 	 	69,570	 	
 	 	 	 	 	 	 	
Total investments and other assets	 	 	719,357	 	 	 	490,520	 	

CURRENT ASSETS	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	 	85,669	 	 	 	52,151	 	
Customer and other receivables	 	 	453,101	 	 	 	402,244	 	
Allowance for doubtful accounts	 	 	(2,019	)	 	 	(4,265	)	
Materials and supplies (at average cost)	 	 	158,059	 	 	 	149,759	 	
Fossil fuel (at average cost)	 	 	23,480	 	 	 	27,792	 	
Assets from risk management and trading activities (Note S-1)	 	 	115,399	 	 	 	34,087	 	
Deferred income taxes	 	 	—	 	 	 	38,707	 	
Other current assets	 	 	16,018	 	 	 	16,545	 	
 	 	 	 	 	 	 	
Total current assets	 	 	849,707	 	 	 	717,020	 	

DEFERRED DEBITS	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power regulatory asset (Note 5)	 	 	22,530	 	 	 	110,928	 	
Other regulatory assets	 	 	501,469	 	 	 	514,353	 	
Unamortized debt issue costs	 	 	23,326	 	 	 	24,373	 	
Other deferred debits	 	 	82,592	 	 	 	78,934	 	
 	 	 	 	 	 	 	
Total deferred debits	 	 	629,917	 	 	 	728,588	 	

TOTAL ASSETS	 	$	10,815,667	 	 	$	10,321,402	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	June 30,	 	 	December 31,	 	
 	 	2008	 	 	2007	 	
LIABILITIES AND EQUITY	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
CAPITALIZATION	 	 	 	 	 	 	 	 	
Common stock	 	$	178,162	 	 	$	178,162	 	
Additional paid-in capital	 	 	2,117,789	 	 	 	2,105,466	 	
Retained earnings	 	 	1,110,575	 	 	 	1,076,557	 	
Accumulated other comprehensive income (loss) (Note S-2):	 	 	 	 	 	 	 	 	
Pension and other postretirement benefits	 	 	(26,802	)	 	 	(21,782	)	
Derivative instruments	 	 	205,897	 	 	 	13,038	 	
 	 	 	 	 	 	 	
Common stock equity	 	 	3,585,621	 	 	 	3,351,441	 	
Long-term debt less current maturities (Note 4)	 	 	2,876,875	 	 	 	2,876,881	 	
 	 	 	 	 	 	 	
Total capitalization	 	 	6,462,496	 	 	 	6,228,322	 	

CURRENT LIABILITIES	 	 	 	 	 	 	 	 	
Short-term debt	 	 	100,000	 	 	 	218,000	 	
Current maturities of long-term debt (Note 4)	 	 	977	 	 	 	978	 	
Accounts payable	 	 	253,827	 	 	 	239,923	 	
Accrued taxes	 	 	208,542	 	 	 	374,444	 	
Accrued interest	 	 	38,455	 	 	 	38,262	 	
Customer deposits	 	 	76,661	 	 	 	71,376	 	
Liabilities from risk management and trading activities (Note S-1)	 	 	42,661	 	 	 	19,921	 	
Deferred income taxes	 	 	97,182	 	 	 	—	 	
Other current liabilities	 	 	98,837	 	 	 	92,802	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	917,142	 	 	 	1,055,706	 	

DEFERRED CREDITS AND OTHER	 	 	 	 	 	 	 	 	
Deferred income taxes	 	 	1,388,921	 	 	 	1,250,028	 	
Regulatory liabilities	 	 	806,911	 	 	 	642,564	 	
Liability for asset retirements	 	 	267,544	 	 	 	281,903	 	
Pension and other postretirement liabilities (Note 6)	 	 	494,227	 	 	 	469,945	 	
Customer advances for construction	 	 	121,343	 	 	 	94,801	 	
Liabilities from long-term risk management and trading activities (Note S-1)	 	 	28,629	 	 	 	4,573	 	
Other	 	 	328,454	 	 	 	293,560	 	
 	 	 	 	 	 	 	
Total deferred credits and other	 	 	3,436,029	 	 	 	3,037,374	 	

COMMITMENTS AND CONTINGENCIES (SEE NOTES)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
TOTAL LIABILITIES AND EQUITY	 	$	10,815,667	 	 	$	10,321,402	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	 	
 	 	June 30,	 	
 	 	2008	 	 	2007	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	 	 	 	
Net income	 	$	119,018	 	 	$	79,407	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
Depreciation and amortization including nuclear fuel	 	 	205,810	 	 	 	195,122	 	
Deferred fuel and purchased power	 	 	(25,867	)	 	 	(132,016	)	
Deferred fuel and purchased power amortization	 	 	114,265	 	 	 	140,925	 	
Deferred fuel and purchased power regulatory disallowance	 	 	—	 	 	 	14,370	 	
Allowance for equity funds used during construction	 	 	(11,538	)	 	 	(9,639	)	
Deferred income taxes	 	 	152,408	 	 	 	(2,862	)	
Changes in mark-to-market valuations	 	 	(28,825	)	 	 	(3,000	)	
Changes in current assets and liabilities:	 	 	 	 	 	 	 	 	
Customer and other receivables	 	 	(47,733	)	 	 	5,583	 	
Materials, supplies and fossil fuel	 	 	(3,988	)	 	 	(23,495	)	
Other current assets	 	 	1,949	 	 	 	(5,060	)	
Accounts payable	 	 	35,147	 	 	 	10,492	 	
Other current liabilities	 	 	(11,450	)	 	 	40,944	 	
Change in margin and collateral accounts	 	 	251,299	 	 	 	3,895	 	
Change in unrecognized tax benefits	 	 	(112,507	)	 	 	—	 	
Change in other long-term assets	 	 	4,072	 	 	 	(24,607	)	
Change in other long-term liabilities	 	 	44,403	 	 	 	44,231	 	
 	 	 	 	 	 	 	
Net cash flow provided by operating activities	 	 	686,463	 	 	 	334,290	 	

CASH FLOWS FROM INVESTING ACTIVITIES	 	 	 	 	 	 	 	 	
Capital expenditures	 	 	(462,598	)	 	 	(426,518	)	
Contributions in aid of construction	 	 	22,970	 	 	 	16,055	 	
Allowance for borrowed funds used during construction	 	 	(7,608	)	 	 	(4,888	)	
Purchases of investment securities	 	 	—	 	 	 	(36,525	)	
Proceeds from sale of investment securities	 	 	—	 	 	 	69,225	 	
Proceeds from nuclear decommissioning trust sales	 	 	188,311	 	 	 	133,463	 	
Investment in nuclear decommissioning trust	 	 	(198,682	)	 	 	(143,834	)	
Other	 	 	555	 	 	 	(3,321	)	
 	 	 	 	 	 	 	
Net cash flow used for investing activities	 	 	(457,052	)	 	 	(396,343	)	

CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	 	 	 	
Equity infusion	 	 	7,601	 	 	 	39,548	 	
Short-term borrowings and payments-net	 	 	(118,000	)	 	 	28,000	 	
Dividends paid on common stock	 	 	(85,000	)	 	 	(85,000	)	
Repayment and reacquisition of long-term debt	 	 	(494	)	 	 	(566	)	
 	 	 	 	 	 	 	
Net cash flow used for financing activities	 	 	(195,893	)	 	 	(18,018	)	
 	 	 	 	 	 	 	
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	 	 	33,518	 	 	 	(80,071	)	
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	 	 	52,151	 	 	 	81,870	 	
 	 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS AT END OF PERIOD	 	$	85,669	 	 	$	1,799	 	
 	 	 	 	 	 	 	
Supplemental disclosure of cash flow information	 	 	 	 	 	 	 	 	
Cash paid during the year for:	 	 	 	 	 	 	 	 	
Income taxes, net of refunds	 	$	7,197	 	 	$	44,424	 	
Interest, net of amounts capitalized	 	$	81,459	 	 	$	78,418	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Condensed Financial Statements.
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     Certain notes to APS’ Condensed Financial Statements are combined with the Notes to Pinnacle West’s Condensed Consolidated Financial Statements. Listed below are the Condensed Consolidated Notes to Pinnacle West’s Condensed Consolidated Financial Statements, the majority of which also relate to APS’ Condensed Financial Statements. In addition, listed below are the Supplemental Notes that are required disclosures for APS and should be read in conjunction with Pinnacle West’s Condensed Consolidated Notes.
 	 	 	 	 	 	 	 	 	
 	 	Condensed	 	APS’	
 	 	Consolidated	 	Supplemental	
 	 	Footnote	 	Footnote	
 	 	Reference	 	Reference	
Consolidation and Nature of Operations	 	Note 1	 	 	—	 	
Condensed Consolidated Financial Statements	 	Note 2	 	 	—	 	
Quarterly Fluctuations	 	Note 3	 	 	—	 	
Liquidity Matters	 	Note 4	 	 	—	 	
Regulatory Matters	 	Note 5	 	 	—	 	
Retirement Plans and Other Benefits	 	Note 6	 	 	—	 	
Business Segments	 	Note 7	 	 	—	 	
Income Taxes	 	Note 8	 	 	—	 	
Variable-Interest Entities	 	Note 9	 	 	—	 	
Derivative and Energy Trading Accounting	 	Note 10	 	Note S-1	
Comprehensive Income	 	Note 11	 	Note S-2	
Commitments and Contingencies	 	Note 12	 	 	—	 	
Nuclear Insurance	 	Note 13	 	 	—	 	
Other Income and Other Expense	 	Note 14	 	Note S-3	
Guarantees	 	Note 15	 	 	—	 	
Earnings Per Share	 	Note 16	 	 	—	 	
Discontinued Operations	 	Note 17	 	 	—	 	
Nuclear Decommissioning Trust	 	Note 18	 	 	—	 	
New Accounting Standards	 	Note 19	 	 	—	 	
Fair Value Measurements	 	Note 20	 	 	—	 	
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S-1. Derivative and Energy Trading Accounting
     APS uses derivative instruments (primarily forward purchases and sales, swaps, options and futures) to manage its exposure to the commodity price risk inherent in the purchase and sale of fuel, electricity and emission allowances and credits. As of June 30, 2008, APS hedged exposures to the price variability of the power and gas commodities for a maximum of 39 months. The changes in the market value of such contracts have a high correlation to price changes in the hedged transactions.
Cash Flow Hedges
     The changes in the fair value of APS’ hedged positions included in the APS Condensed Statements of Income, after consideration of amounts deferred under the PSA, for the three and six months ended June 30, 2008 and 2007 were comprised of the following (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30,	 	June 30,	
 	 	2008	 	2007	 	2008	 	2007	
Gains on the ineffective portion of derivatives qualifying for hedge accounting	 	$	1,315	 	 	$	422	 	 	$	2,405	 	 	$	1,333	 	
Gains from the discontinuance of cash flow hedges	 	 	—	 	 	 	—	 	 	 	—	 	 	 	150	 	
     During the next twelve months ending June 30, 2009, APS estimates that a net gain of $161 million before income taxes will be reclassified from accumulated other comprehensive income as an offset to the effect of market price changes for the related hedged transactions. To the extent the gains are eligible for inclusion in the PSA, the amounts will be recorded as either a regulatory asset or liability and have no effect on earnings.
FIN 39-1
     We adopted FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts” (FIN 39-1), on January 1, 2008. In accordance with this guidance, we elected to offset the fair value amounts for derivative instruments, including collateral, executed with the same counterparty under a master netting arrangement. Collateral was previously reported in other current assets or other current liabilities on our Condensed Balance Sheets. This guidance required retrospective application for all prior periods presented. As a result, APS’ Condensed Balance Sheet and Statement of Cash Flows line items changed by the following amounts (dollars in thousands):
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 	 	As originally	 	Reclassifications	 	 	
 	 	reported in the	 	as a result of the	 	 	
 	 	2007	 	adoption of	 	After adoption	
Balance Sheet - December 31, 2007	 	Form 10-K	 	FIN 39-1	 	of FIN 39-1	
Current Assets — Assets from risk management and trading activities	 	$	73,854	 	 	$	(39,767	)	 	$	34,087	 	
Current Assets — Other current assets	 	 	17,296	 	 	 	(751	)	 	 	16,545	 	
Investments and Other Assets — Assets from long-term risk management and trading activities	 	 	82,588	 	 	 	(40,985	)	 	 	41,603	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Current Liabilities — Liabilities from risk management and trading activities	 	 	60,439	 	 	 	(40,518	)	 	 	19,921	 	
Deferred Credits and Other — Liabilities from long-term risk management and trading activities	 	 	45,558	 	 	 	(40,985	)	 	 	4,573	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As originally	 	Reclassifications	 	 	
 	 	reported in the	 	as a result of the	 	 	
Statement of Cash Flows —	 	June 30, 2007	 	adoption of	 	After adoption	
Six months ended June 30, 2007	 	Form 10-Q	 	FIN 39-1	 	of FIN 39-1	
Change in margin and collateral accounts	 	$	22,857	(a)	 	$	(18,962	)	 	$	3,895	 	
Change in risk management and trading — liabilities	 	 	(2,306	)	 	 	20,221	 	 	 	17,915	(b)	
Collateral	 	 	1,259	 	 	 	(1,259	)	 	 	—	 	

(a)	 	Change in margin and collateral accounts were netted with other long-term assets on APS’ Condensed Statement of Cash Flows presented in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.	
(b)	 	Risk management and trading — liabilities are netted with other long-term liabilities on APS’ Condensed Statements of Cash Flows.	
     The following tables summarize APS’ assets and liabilities from risk management and trading activities presented net in accordance with FIN 39-1 (dollars in thousands):
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 	 	 	 	 	 	Investments	 	 	 	 	 	 	Deferred	 	 	 	 	
 	 	Current	 	 	and Other	 	 	Current	 	 	Credits and	 	 	Net Asset	 	
June 30, 2008	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	(Liability)	 	
Mark-to-market	 	$	315,718	 	 	$	301,999	 	 	$	(42,661	)	 	$	(28,629	)	 	$	546,427	 	
Margin account liability	 	 	(138,349	)	 	 	1,141	 	 	 	—	 	 	 	—	 	 	 	(137,208	)	
Collateral provided to counterparties	 	 	1,800	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,800	 	
Collateral provided from counterparties	 	 	(63,770	)	 	 	(20,849	)	 	 	—	 	 	 	—	 	 	 	(84,619	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	115,399	 	 	$	282,291	 	 	$	(42,661	)	 	$	(28,629	)	 	$	326,400	 	

 	 	 	 	 	 	Investments	 	 	 	 	 	 	Deferred	 	 	 	 	
 	 	Current	 	 	and Other	 	 	Current	 	 	Credits and	 	 	 	 	
December 31, 2007	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	Net Asset	 	
Mark-to-market	 	$	2,815	 	 	$	41,603	 	 	$	(26,197	)	 	$	(4,573	)	 	$	13,648	 	
Margin account	 	 	30,650	 	 	 	—	 	 	 	6,148	 	 	 	—	 	 	 	36,798	 	
Collateral provided to counterparties	 	 	622	 	 	 	—	 	 	 	128	 	 	 	—	 	 	 	750	 	
Collateral provided from counterparties	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	34,087	 	 	$	41,603	 	 	$	(19,921	)	 	$	(4,573	)	 	$	51,196	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     We maintain a margin account with a broker to support our risk management and trading activities. Cash is deposited with the broker in this account at the time futures or options contracts are initiated. The change in market value of these contracts (reflected in mark-to-market) requires adjustment of the margin account balance.
     See Note 20 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted January 1, 2008.
S-2. Comprehensive Income
     Components of APS’ comprehensive income for the three and six months ended June 30, 2008 and 2007 are as follows (dollars in thousands):
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 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Net income	 	$	125,382	 	 	$	75,090	 	 	$	119,018	 	 	$	79,407	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized gains (losses) on derivative instruments (a)	 	 	234,352	 	 	 	(25,781	)	 	 	341,368	 	 	 	24,764	 	
Net reclassification of realized gains to income (b)	 	 	(26,647	)	 	 	(6,270	)	 	 	(23,329	)	 	 	(5,529	)	
Net unrealized losses related to pension benefits (c)	 	 	(10,279	)	 	 	(44,613	)	 	 	(10,279	)	 	 	(44,613	)	
Reclassification of pension and other postretirement benefits to income	 	 	1,206	 	 	 	—	 	 	 	2,001	 	 	 	—	 	
Income tax benefit (expense) related to items of other comprehensive income	 	 	(78,182	)	 	 	30,082	 	 	 	(121,922	)	 	 	9,958	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other comprehensive income (loss)	 	 	120,450	 	 	 	(46,582	)	 	 	187,839	 	 	 	(15,420	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	$	245,832	 	 	$	28,508	 	 	$	306,857	 	 	$	63,987	 	

			
(a)	 	These amounts primarily include unrealized gains and losses on contracts used to hedge our forecasted electricity and natural gas requirements to serve Native Load. These changes are primarily due to changes in forward natural gas prices and wholesale electricity prices.	
 		
(b)	 	These amounts primarily include the reclassification of unrealized gains and losses to realized gains and losses for contracted commodities delivered during the period.	
 		
(c)	 	In accordance with the ACC’s June 28, 2007 order in APS’ general rate case, these amounts primarily include costs that were recorded previously as a regulatory asset and have now been charged to other comprehensive income.	
S-3. Other Income and Other Expense
     The following table provides detail of APS’ other income and other expense for the three and six months ended June 30, 2008 and 2007 (dollars in thousands):
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 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Other income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	602	 	 	$	1,512	 	 	$	2,325	 	 	$	4,859	 	
Investment gains — net	 	 	—	 	 	 	2,141	 	 	 	—	 	 	 	2,518	 	
Miscellaneous	 	 	432	 	 	 	703	 	 	 	773	 	 	 	1,412	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income	 	$	1,034	 	 	$	4,356	 	 	$	3,098	 	 	$	8,789	 	

Other expense:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Non-operating costs (a)	 	$	(2,864	)	 	$	(2,001	)	 	$	(6,186	)	 	$	(5,234	)	
Investment losses — net	 	 	(1,411	)	 	 	—	 	 	 	(2,863	)	 	 	—	 	
Miscellaneous	 	 	(1,925	)	 	 	(768	)	 	 	(3,039	)	 	 	(2,439	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other expense	 	$	(6,200	)	 	$	(2,769	)	 	$	(12,088	)	 	$	(7,673	)	

			
(a)	 	As defined by the FERC, includes below-the-line non-operating utility income and expense (items excluded from utility rate recovery).	
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
     The following discussion should be read in conjunction with Pinnacle West’s Condensed Consolidated Financial Statements and Arizona Public Service Company’s Condensed Financial Statements and the related Notes that appear in Item 1 of this report.
OVERVIEW
     Pinnacle West owns all of the outstanding common stock of APS. APS is a vertically-integrated electric utility that provides retail and wholesale electric service to most of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona. APS has historically accounted for a substantial part of our revenues and earnings, and is expected to continue to do so. Although customer growth in APS’ service territory has recently decreased, as well as our customer growth outlook for the next several years, it is still at or above the national average and remains an important driver of our revenues and earnings.
     Our cash flows and profitability are affected by the rates APS may charge and the timely recovery of costs through those rates. APS’ retail rates are regulated by the ACC and its wholesale electric rates (primarily for transmission) are regulated by the FERC. APS’ capital expenditure requirements, which are discussed below under “Liquidity and Capital Resources,” are substantial because of customer growth in APS’ service territory, inflationary impacts on the capital budget and increased generation, environmental and reliability costs, highlighting APS’ need for the timely recovery through rates of these and other expenditures. See “Pinnacle West Consolidated – Factors Affecting Our Financial Outlook” below. On March 24, 2008, and later updated on June 2, 2008, APS filed a rate case with the ACC requesting, among other things, an increase in rates to help defray rising infrastructure costs, approval of an impact fee and approval of new conservation rates. Details of the current ACC rate case, a request for an interim increase related to this rate case, and other retail and wholesale rate matters are discussed in Note 5.
     SunCor, our real estate development subsidiary, has been an important source of earnings in recent years, although SunCor’s earnings in 2007 and expected earnings in 2008 reflect the weak real estate market. See discussion below in “Pinnacle West Consolidated – Factors Affecting our Financial Outlook – Subsidiaries.” Our subsidiary, APSES, provides energy-related products and services to commercial and industrial retail customers in the western United States. El Dorado, our investment subsidiary, owns minority interests in several energy-related investments and Arizona community-based ventures.
     We continue to focus on solid operational performance in our electricity generation and delivery activities. In the delivery area, we focus on superior reliability and customer satisfaction. We plan to expand long-term energy resources and our transmission and distribution systems to meet the electricity needs of our growing retail customers and sustain reliability.
     See “Pinnacle West Consolidated – Factors Affecting Our Financial Outlook” below for a discussion of several factors that could affect our future financial results.
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EARNINGS CONTRIBUTION BY BUSINESS SEGMENT
     Pinnacle West’s two reportable business segments are:

 	•	 	our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities and includes electricity generation, transmission and distribution; and	
 		
 	•	 	our real estate segment, which consists of SunCor’s real estate development and investment activities.	
     The following table presents income from continuing operations for our regulated electricity and real estate segments and reconciles those amounts to net income in total for the three months and six months ended June 30, 2008 and 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Regulated electricity segment	 	$	121	 	 	$	71	 	 	$	114	 	 	$	74	 	
Real estate segment	 	 	(5	)	 	 	—	 	 	 	(6	)	 	 	10	 	
All other (a)	 	 	(2	)	 	 	8	 	 	 	1	 	 	 	12	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	114	 	 	 	79	 	 	 	109	 	 	 	96	 	
Income from discontinued operations, real estate segment — net of tax (b)	20	 	 	 	—	 	 	 	20	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	134	 	 	$	79	 	 	$	129	 	 	$	96	 	

			
(a)	 	Includes activities related to marketing and trading, APSES and El Dorado. None of these segments is a reportable segment.	
 		
(b)	 	Primarily relates to a commercial property sale.	
PINNACLE WEST CONSOLIDATED — RESULTS OF OPERATIONS
Operating Results — Three-month period ended June 30, 2008 compared with three-month period ended June 30, 2007
     Our consolidated net income for the three months ended June 30, 2008 was $134 million compared with net income of $79 million for the comparable prior-year period. Net income increased $55 million in the period-to-period comparison and is reflected in the segments as follows:

 	•	 	Regulated Electricity Segment — Net income increased approximately $50 million due to various factors, including income tax benefits of $30 million related to prior years resolved in 2008; the impacts of retail and transmission rate increases; increased mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals; a regulatory disallowance in 2007; increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts; and higher retail sales primarily due to customer growth. These positive factors were partially offset by the effects of milder weather on retail sales; higher operations and maintenance expense primarily related to distribution system reliability, generation costs (including planned maintenance and overhauls), and other costs; and higher depreciation and amortization primarily due to higher plant balances.	
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 	•	 	Real Estate Segment — Net income increased approximately $15 million primarily due to a commercial property sale in 2008, partially offset by lower land parcel sales resulting from the weak real estate market.	
 		
 	•	 	Other — Net income decreased approximately $10 million primarily due to lower marketing and trading contributions as a result of lower sales volumes.	
     Additional details on the major factors that increased (decreased) net income for the three-month period ended June 30, 2008 compared with the prior-year period are contained in the following table (dollars in millions):
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 	 	Increase (Decrease)	 	
 	 	Pretax	 	 	After Tax	 	
Regulated electricity segment:	 	 	 	 	 	 	 	 	
Impacts of retail rate increase effective July 1, 2007 and transmission rate increase effective
March 1, 2008:	 	 	 	
Retail revenue increase primarily related to higher Base Fuel Rate	 	$	93	 	 	$	57	 	
Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate	 	 	(76	)	 	 	(46	)	
Transmission rate increase (including a retail rate component)	 	 	7	 	 	 	4	 	
Higher mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals	 	 	17	 	 	 	10	 	
Regulatory disallowance in 2007	 	 	14	 	 	 	8	 	
Increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts	 	 	7	 	 	 	4	 	
Higher retail sales primarily due to customer growth, excluding weather effects	 	 	6	 	 	 	4	 	
Effects of milder weather on retail sales	 	 	(18	)	 	 	(11	)	
Higher operations and maintenance expense primarily related to distribution system reliability, increased generation costs (including planned maintenance and overhauls), and other costs	 	 	(12	)	 	 	(7	)	
Higher depreciation and amortization primarily due to higher plant balances	 	 	(5	)	 	 	(3	)	
Income tax benefits related to prior years resolved in 2008	 	 	—	 	 	 	30	 	
Miscellaneous items, net	 	 	2	 	 	 	—	 	
 	 	 	 	 	 	 	
Increase in regulated electricity segment net income	 	 	35	 	 	 	50	 	
 	 	 	 	 	 	 	
Lower real estate segment income from continuing operations primarily due to lower land parcel sales resulting from the weak real estate market	 	 	(8	)	 	 	(5	)	
Lower marketing and trading contribution primarily due to lower sales volumes	 	 	(13	)	 	 	(8	)	
Other miscellaneous items, net	 	 	(2	)	 	 	(2	)	
 	 	 	 	 	 	 	
Increase in income from continuing operations	 	$	12	 	 	 	35	 	
 	 	 	 	 	 	 	 	
Increase in real estate segment income from discontinued operations primarily related to a commercial property sale	 	 	 	 	 	 	20	 	
 	 	 	 	 	 	 	 	
Increase in net income	 	 	 	 	 	$	55	 	
 	 	 	 	 	 	 	 	
Regulated Electricity Segment Revenues
     Regulated electricity segment revenues were $118 million higher for the three months ended June 30, 2008 compared with the prior-year period primarily because of:

 	•	 	a $93 million increase in retail revenues due to a rate increase effective July 1, 2007;	
 		
 	•	 	a $20 million increase in revenues from Off-System Sales due to higher prices and volumes;	
 		
 	•	 	a $13 million increase in revenues related to long-term traditional wholesale contracts;	
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 	•	 	an $8 million increase in retail revenues primarily related to customer growth, excluding weather effects;	
 		
 	•	 	a $7 million increase due to a transmission rate increase (including a retail rate component) effective March 1, 2008;	
 		
 	•	 	a $24 million decrease in retail revenue due to the effects of milder weather;	
 		
 	•	 	an $8 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because of amortization of the same amount recorded as fuel and purchased power expense; and	
 		
 	•	 	a $9 million net increase due to miscellaneous factors.	
Real Estate Segment Revenues
     Real estate segment revenues were $11 million lower for the three months ended June 30, 2008 compared with the prior-year period primarily due to lower land parcel and home sales as a result of the weak real estate market.
All Other Revenues
     All other revenues were $44 million lower for the three months ended June 30, 2008 compared with the prior-year period primarily due to the planned reduction of APSES’ retail commodity-related energy services and a decrease in other marketing and trading activities.
Operating Results — Six-month period ended June 30, 2008 compared with six-month period ended June 30, 2007
     Our consolidated net income for the six months ended June 30, 2008 was $129 million compared with net income of $96 million for the comparable prior-year period. Net income increased $33 million in the period-to-period comparison and is reflected in the segments as follows:

 	•	 	Regulated Electricity Segment — Net income increased approximately $40 million due to various factors, including income tax benefits of $30 million related to prior years resolved in 2008; the impacts of retail and transmission rate increases; increased mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals; a regulatory disallowance in 2007; higher retail sales primarily due to customer growth; and increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts. These positive factors were partially offset by higher operations and maintenance expense primarily related to increased generation costs (including planned maintenance and overhauls), increased costs related to distribution system reliability, and other costs; the effects of milder weather on retail sales; and higher depreciation and amortization primarily due to higher plant balances.	
 		
 	•	 	Real Estate Segment — Net income increased approximately $4 million primarily due to a commercial property sale in 2008, partially offset by lower land parcel sales resulting from the weak real estate market.	
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 	•	 	Other — Net income decreased approximately $11 million primarily due to lower marketing and trading contributions as a result of lower sales volumes.	
     Additional details on the major factors that increased (decreased) net income for the six-month period ended June 30, 2008 compared with the prior-year period are contained in the following table (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Increase (Decrease)	 	
 	 	Pretax	 	 	After Tax	 	
Regulated electricity segment:	 	 	 	 	 	 	 	 	
Impacts of retail rate increase effective July 1, 2007 and transmission rate increase effective
March 1, 2008:	 	 	 	
Retail revenue increase primarily related to higher Base Fuel Rate	 	$	156	 	 	$	95	 	
Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate	 	 	(141	)	 	 	(86	)	
Transmission rate increase (including a retail rate component)	 	 	10	 	 	 	6	 	
Higher mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals	 	 	26	 	 	 	16	 	
Regulatory disallowance in 2007	 	 	14	 	 	 	8	 	
Higher retail sales primarily due to customer growth, excluding weather effects	 	 	12	 	 	 	7	 	
Increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts	 	 	11	 	 	 	7	 	
Effects of milder weather on retail sales	 	 	(19	)	 	 	(12	)	
Operations and maintenance expense increases primarily due to:	 	 	 	 	 	 	 	 	
Increased customer service and other costs as a result of distribution system reliability	 	 	(18	)	 	 	(11	)	
Increased generation costs, including more planned maintenance and overhauls	 	 	(15	)	 	 	(9	)	
Higher depreciation and amortization primarily due to higher plant balances	 	 	(11	)	 	 	(7	)	
Income tax benefits related to prior years resolved in 2008	 	 	—	 	 	 	30	 	
Miscellaneous items, net	 	 	(3	)	 	 	(4	)	
 	 	 	 	 	 	 	
Increase in regulated electricity segment net income	 	 	22	 	 	 	40	 	
 	 	 	 	 	 	 	
Lower real estate segment income from continuing operations primarily due to lower land parcel sales resulting from the weak real estate market	 	 	(26	)	 	 	(16	)	
Lower marketing and trading contribution primarily due to lower sales volumes	 	 	(21	)	 	 	(13	)	
Other miscellaneous items, net	 	 	6	 	 	 	2	 	
 	 	 	 	 	 	 	
Increase (decrease) in income from continuing operations	 	$	(19	)	 	 	13	 	
 	 	 	 	 	 	 	 	
Increase in real estate segment income from discontinued operations primarily related to a commercial property sale	 	 	 	 	 	 	20	 	
 	 	 	 	 	 	 	 	
Increase in net income	 	 	 	 	 	$	33	 	
 	 	 	 	 	 	 	 	
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Regulated Electricity Segment Revenues
     Regulated electricity segment revenues were $205 million higher for the six months ended June 30, 2008 compared with the prior-year period primarily because of:

 	•	 	a $156 million increase in retail revenues due to a rate increase effective July 1, 2007;	
 		
 	•	 	a $37 million increase in revenues from Off-System Sales due to higher prices and volumes;	
 		
 	•	 	a $20 million increase in revenues related to long-term traditional wholesale contracts;	
 		
 	•	 	a $16 million increase in retail revenues primarily related to customer growth, excluding weather effects;	
 		
 	•	 	a $10 million increase due to a transmission rate increase (including a retail rate component) effective March 1, 2008;	
 		
 	•	 	a $26 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because of amortization of the same amount recorded as fuel and purchased power expense;	
 		
 	•	 	a $25 million decrease in retail revenue due to the effects of milder weather; and	
 		
 	•	 	a $17 million net increase due to miscellaneous factors.	
Real Estate Segment Revenues
     Real estate segment revenues were $40 million lower for the six months ended June 30, 2008 compared with the prior-year period primarily due to lower land parcel sales as a result of the weak real estate market.
All Other Revenues
     All other revenues were $60 million lower for the six months ended June 30, 2008 compared with the prior-year period primarily due to the planned reduction of APSES’ retail commodity-related energy services and a decrease in other marketing and trading activities.
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PINNACLE WEST CONSOLIDATED — LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
     The following table presents net cash provided by (used for) operating, investing and financing activities for the six months ended June 30, 2008 and 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	
 	 	June 30,	
 	 	2008	 	2007	
Net cash flow provided by operating activities	 	$	679	 	 	$	290	 	
Net cash flow used for investing activities	 	 	(379	)	 	 	(428	)	
Net cash flow provided by (used for) financing activities	 	 	(259	)	 	 	74	 	
     The increase of approximately $389 million in net cash provided by operating activities is primarily due to increased collateral and margin cash collected from counterparties as a result of changes in commodity prices; increased retail revenue related to higher Base Fuel Rates; and lower real estate investments as a result of the weak real estate market. These positive factors were partially offset by changes in working capital.
     The decrease of approximately $49 million in net cash used for investing activities is primarily due to a real estate commercial property sale in 2008, partially offset by lower cash proceeds from the sale of investment securities at APS and higher levels of capital expenditures (see table and discussion below).
     The increase of approximately $333 million in net cash used for financing activities is primarily due to lower levels of short-term debt as a result of higher cash from operations and lower levels of long-term debt as a result of the proceeds from the sale of a real estate commercial property in 2008.
Liquidity
      Capital Expenditure Requirements
     The following table summarizes the actual capital expenditures for the six months ended June 30, 2007 and 2008 and estimated capital expenditures, net of contributions in aid of construction, for the next three years:
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CAPITAL EXPENDITURES
(dollars in millions)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	 	 	Estimated for the Year Ended	 	
 	 	June 30,	 	 	December 31,	 	
 	 	2007	 	 	2008	 	 	2008	 	 	2009	 	 	2010	 	
APS Distribution	 	$	198	 	 	$	173	 	 	$	380	 	 	$	340	 	 	$	280	 	
Generation (a)	 	 	85	 	 	 	164	 	 	 	380	 	 	 	390	 	 	 	380	 	
Transmission	 	 	120	 	 	 	81	 	 	 	220	 	 	 	320	 	 	 	290	 	
Other (b)	 	 	6	 	 	 	11	 	 	 	50	 	 	 	40	 	 	 	50	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	409	 	 	 	429	 	 	 	1,030	 	 	 	1,090	 	 	 	1,000	 	
SunCor (c)	 	 	99	 	 	 	25	 	 	 	50	 	 	 	30	 	 	 	100	 	
Other	 	 	1	 	 	 	6	 	 	 	20	 	 	 	20	 	 	 	10	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	509	 	 	$	460	 	 	$	1,100	 	 	$	1,140	 	 	$	1,110	 	

			
(a)	 	Generation includes nuclear fuel expenditures of approximately $90 million to $120 million per year for 2008, 2009 and 2010.	
 		
(b)	 	Primarily information systems and facilities projects.	
 		
(c)	 	Primarily capital expenditures for residential, land development and retail and office building construction reflected in “Expenditures for real estate investments” and “Capital expenditures” on the Condensed Consolidated Statements of Cash Flows.	
     Distribution and transmission capital expenditures are comprised of infrastructure additions and upgrades, capital replacements, new customer construction and related information systems and facility costs. Examples of the types of projects included in the forecast include power lines, substations, line extensions to new residential and commercial developments and upgrades to customer information systems, partially offset by amounts for the recent changes in the line extension policy. See “Line Extension Schedule” in Note 3 of the 2007 Form 10-K for further details regarding the recent changes to the line extension policy.
     Generation capital expenditures are comprised of various improvements to APS’ existing fossil and nuclear plants. Examples of the types of projects included in this category are additions, upgrades and capital replacements of various power plant equipment such as turbines, boilers and environmental equipment. Environmental expenditures are estimated at approximately $70 million to $120 million per year for 2008, 2009 and 2010. We are also monitoring the status of certain environmental matters, which, depending on their final outcome, could require modification to our environmental expenditures. (See “Business of Arizona Public Service Company — Environmental Matters — Regional Haze Rules” in Item 1 of the 2007 Form 10-K and “Environmental Matters - Mercury” in Part II, Item 5 below.)
     In early 2008, we announced and began implementing a cost reduction effort that includes the elimination of approximately $200 million of capital expenditures for the years 2008-2012 and operations and maintenance expense reductions relating to staffing and other costs. These capital expenditure reductions, as they relate to the years 2008-2010, are included in the estimates provided above. In addition, we are pursuing a reduction of at least an additional $500 million in capital expenditures over the next three years, with implementation
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beginning in late 2008, due to our reduced customer growth outlook (see “Pinnacle West Consolidated — Factors Affecting Our Financial Outlook — Customer and Sales Growth” below), deferral of several large transmission projects, and reduction in general plant capital expenditures. Since the review and analysis of this effort is still in progress, the capital expenditure estimates above do not yet include these reductions.
     Capital expenditures will be funded with internally generated cash and/or external financings, which may include issuances of long-term debt and Pinnacle West common stock.
      Pinnacle West (Parent Company)
     Our primary cash needs are for dividends to our shareholders and principal and interest payments on our long-term debt. The level of our common stock dividends and future dividend growth will be dependent on a number of factors including, but not limited to, our outlook for future business prospects, payout ratio trends, free cash flow and financial market conditions.
     Our primary sources of cash are dividends from APS, external debt and equity financings and cash distributions from our other subsidiaries, primarily SunCor. An existing ACC order requires APS to maintain a common equity ratio of at least 40% and prohibits APS from paying common stock dividends if the payment would reduce its common equity below that threshold. As defined in the ACC order, the common equity ratio is common equity divided by the sum of common equity and long-term debt, including current maturities of long-term debt. At June 30, 2008, APS’ common equity ratio, as defined, was approximately 55%.
     Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and our subsidiaries. IRS regulations require us to contribute a minimum amount to the qualified plan. We contribute at least the minimum amount required under IRS regulations, but no more than the maximum tax-deductible amount. The minimum required funding takes into consideration the value of plan assets and our pension obligation. The assets in the plan are comprised of fixed-income, equity and short-term investments. Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions. We contributed approximately $52 million in 2007. The contribution to our pension plan in 2008 is estimated to be approximately $35 million. The expected contribution to our other postretirement benefit plans in 2008 is estimated to be approximately $20 million, of which $10 million has been contributed through August 2008. APS and other subsidiaries fund their share of the contributions. APS’ share is approximately 96% of both plans.
     On July 23, 2008, the Pinnacle West Board of Directors declared a quarterly dividend of $0.525 per share of common stock, payable on September 2, 2008, to shareholders of record on August 1, 2008.
     See “Equity Infusion Notice” in Note 5 for information regarding Pinnacle West’s filing of a notice with the ACC regarding a potential equity infusion into APS of up to $400 million.
      APS
     APS’ capital requirements consist primarily of capital expenditures and mandatory redemptions of long-term debt. APS pays for its capital requirements with cash from operations, equity infusions from Pinnacle West and, to the extent necessary, external financings. APS has historically paid its dividends to Pinnacle West with cash from operations. See “Pinnacle West (Parent Company)” above
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for a discussion of the common equity ratio that APS must maintain in order to pay dividends to Pinnacle West.
      Other Financing Matters — Although APS defers actual retail fuel and purchased power costs on a current basis, APS’ recovery of the deferrals from its ratepayers is subject to annual and, if necessary, periodic PSA adjustments. See “PSA Modifications” in Note 3, Item 8 of the 2007 Form 10-K for information regarding the PSA approved by the ACC.
     See “Cash Flow Hedges” in Note 10 for information related to the change in our margin account.
      Other Subsidiaries
     During the past three years, SunCor funded its cash requirements with cash from operations and its own external financings. SunCor’s capital needs consist primarily of capital expenditures for land development and retail and office building construction. See the capital expenditures table above for actual capital expenditures during the six months ended June 30, 2007 and 2008 and projected capital expenditures for the next three years. SunCor expects to fund its future capital requirements with cash from operations and external financings.
     El Dorado expects minimal capital requirements over the next three years and intends to focus on prudently realizing the value of its existing investments.
     APSES expects minimal capital expenditures over the next three years.
      Debt Provisions
     Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include debt to capitalization ratios. Certain of APS’ bank financing arrangements also include an interest coverage test. Pinnacle West and APS comply with these covenants and each anticipates it will continue to meet these and other significant covenant requirements. For both Pinnacle West and APS, these covenants require that the ratio of consolidated debt to total consolidated capitalization not exceed 65%. At June 30, 2008, the ratio was approximately 49% for Pinnacle West and 46% for APS. The provisions regarding interest coverage require minimum cash coverage of two times the interest requirements for APS. The interest coverage was approximately 5 times under APS’ bank financing agreements as of June 30, 2008. Failure to comply with such covenant levels would result in an event of default which, generally speaking, would require the immediate repayment of the debt subject to the covenants and could cross-default other debt. See further discussion of “cross-default” provisions below.
     Neither Pinnacle West’s nor APS’ financing agreements contain “rating triggers” that would result in an acceleration of the required interest and principal payments in the event of a rating downgrade. However, our bank financial agreements contain a pricing grid in which the interest costs we pay are determined by our current credit ratings.
     All of Pinnacle West’s loan agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default under certain other material agreements. All of APS’ bank agreements contain cross-default provisions that would result in defaults and the potential acceleration of payment under these bank agreements if APS were to default under certain other material agreements. Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings.
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     See Note 4 for further discussions.
      Credit Ratings
     The ratings of securities of Pinnacle West and APS as of August 5, 2008 are shown below. The ratings reflect the respective views of the rating agencies, from which an explanation of the significance of their ratings may be obtained. There is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely affect the market price of Pinnacle West’s or APS’ securities and serve to increase the cost of and access to capital. It may also require additional collateral related to certain derivative instruments, natural gas transportation, fuel supply, and other energy-related contracts.
 	 	 	 	 	 	 	
 	 	Moody’s	 	Standard & Poor’s	 	Fitch	
Pinnacle West	 	 	 	 	 	 	
Senior unsecured (a)	 	Baa3 (P)	 	BB+ (prelim)	 	N/A	
Commercial paper	 	P-3	 	A-3	 	F3	
Outlook	 	Stable	 	Stable	 	Negative	
 	 	 	 	 	 	 	
APS	 	 	 	 	 	 	
Senior unsecured	 	Baa2	 	BBB-	 	BBB	
Secured lease obligation bonds	 	Baa2	 	BBB-	 	BBB	
Commercial paper	 	P-2	 	A-3	 	F3	
Outlook	 	Stable	 	Stable	 	Stable	

(a)	 	Pinnacle West has a shelf registration under SEC Rule 415. Pinnacle West currently has no outstanding, rated senior unsecured securities. However, Moody’s assigned a provisional (P) rating and Standard & Poor’s assigned a preliminary (prelim) rating to the senior unsecured securities that can be issued under such shelf registration.	
      Off-Balance Sheet Arrangements
     In 1986, APS entered into agreements with three separate VIE lessors in order to sell and lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in accordance with GAAP. We are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate them (see Note 9).
     APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assume the debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as of June 30, 2008, APS would have been required to assume approximately $188 million of debt and pay the equity participants approximately $169 million.
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      Guarantees and Letters of Credit
     We have issued parental guarantees and letters of credit and obtained surety bonds on behalf of our subsidiaries. Our parental guarantees for Pinnacle West Marketing & Trading and APS relate to commodity energy products. Our credit support instruments enable APSES to offer energy-related products and commodity energy. Non-performance or non-payment under the original contract by our subsidiaries would require performance under the guarantee or surety bond. No liability is currently recorded on the Condensed Consolidated Balance Sheets related to Pinnacle West’s current outstanding guarantees on behalf of our subsidiaries. Our guarantees have no recourse or collateral provisions to allow us to recover amounts paid under the guarantees. We generally agree to indemnification provisions related to liabilities arising from or related to certain of our agreements, with limited exceptions depending on the particular agreement. See Note 15 for additional information regarding guarantees and letters of credit.
Contractual Obligations
     Our future contractual obligations related to fuel and purchased power contracts have increased from approximately $3.1 billion at December 31, 2007 to $8.2 billion at June 30, 2008 as follows (dollars in billions):
 	 	 	 	 	 	 	 	 	
2008	 	2009–2010	 	2011–2012	 	Thereafter	 	Total	
 	 	 	 	 	 	 	 	 	
$0.6	 	$0.7	 	$0.7	 	$6.2	 	$8.2	
     This increase is primarily due to contingent obligations related to renewable energy contracts, primarily the 280MW solar project described in “Portfolio Resources — Alternative Generation Sources” in Part I, Item 1 of the 2007 Form 10-K.
     See Note 4 for a list of payments due on total long-term debt and capitalized lease requirements.
CRITICAL ACCOUNTING POLICIES
     In preparing the financial statements in accordance with GAAP, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex and actual results could differ from those estimates. Our most critical accounting policies include the impacts of regulatory accounting, the determination of the appropriate accounting for our pension and other postretirement benefits and derivatives accounting. There have been no changes to our critical accounting policies since our 2007 Form 10-K. See “Critical Accounting Policies” in Item 7 of the 2007 Form 10-K for further details about our critical accounting policies.
OTHER ACCOUNTING MATTERS
     See Note 20 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted January 1, 2008.
     See Notes 10 and S-1 for discussions of FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts” (FIN 39-1), which we adopted January 1, 2008.
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     We adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” effective January 1, 2008. This guidance provides companies with an option to report selected financial assets and liabilities at fair value. We did not elect the fair value option for any of our financial assets or liabilities. Therefore, SFAS No. 159 did not have an impact on our financial statements.
     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This guidance requires enhanced disclosures about derivative instruments and hedging activities. The Statement is effective for us on January 1, 2009. We are currently evaluating this new guidance but do not expect it to have a material impact on our financial statements.
PINNACLE WEST CONSOLIDATED — FACTORS AFFECTING OUR FINANCIAL OUTLOOK
Factors Affecting Operating Revenues, Fuel and Purchased Power Costs
      General Electric operating revenues are derived from sales of electricity in regulated retail markets in Arizona and, to a lesser extent, from competitive retail and wholesale power markets in the western United States. For the years 2005 through 2007, retail electric revenues comprised approximately 84% of our total electric operating revenues. Our electric operating revenues are affected by electricity sales volumes related to customer growth, variations in weather from period to period, customer mix, average usage per customer, electricity rates and tariffs and the recovery of PSA deferrals. Off-System Sales of excess generation output and purchased power are included in regulated electricity segment revenues and related fuel and purchased power because they are credited to APS’ retail customers through the PSA. These revenue transactions are affected by the availability of excess economic generation or other energy resources and wholesale market conditions, including demand and prices.
      Rate Proceedings Our cash flows and profitability are affected by the rates APS may charge and the timely recovery of costs through those rates. APS’ retail rates are regulated by the ACC and its wholesale electric rates (primarily for transmission) are regulated by the FERC. APS’ capital expenditure requirements, which are discussed above under “Liquidity and Capital Resources - Capital Expenditure Requirements,” are substantial because of customer growth in APS’ service territory, inflationary impacts on the capital budget and increased generation, environmental and reliability costs, highlighting APS’ need for the timely recovery through rates of these and other expenditures. On March 24, 2008, and later updated on June 2, 2008, APS filed a rate case with the ACC requesting, among other things, an increase in rates to help defray rising infrastructure costs, approval of an impact fee and approval of new conservation rates. Details of the current ACC rate case, a request for an interim increase related to this rate case, and other retail and wholesale rate matters are discussed in Note 5.
      Fuel and Purchased Power Costs Fuel and purchased power costs included on our Condensed Consolidated Statements of Income are impacted by our electricity sales volumes, existing contracts for purchased power and generation fuel, our power plant performance, transmission availability or constraints, prevailing market prices, new generating plants being placed in service in our market areas, our hedging program for managing such costs and, since April 1, 2005, PSA deferrals and the amortization thereof. See “PSA Modifications” in Note 3, Item 8 of the 2007 Form 10-K for information regarding the PSA. APS’ recovery of PSA deferrals from its ratepayers is subject to annual and, if necessary, periodic PSA adjustments.
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      Customer and Sales Growth The customer and sales growth referred to in this paragraph apply to Native Load customers and sales to them. Customer growth in APS’ service territory for the six-month period ended June 30, 2008 was 1.8% compared with the prior-year period. Customer growth averaged 4.0% a year for the three years 2005 through 2007; and we currently expect customer growth to decline, averaging about 1% per year for 2008 through 2010 due to factors reflecting the economic conditions both nationally and in Arizona. For the three years 2005 through 2007, APS’ actual retail electricity sales in kilowatt-hours grew at an average annual rate of 4.9%; adjusted to exclude the effects of weather variations, such retail sales growth averaged 4.0% a year. We currently estimate that total retail electricity sales in kilowatt-hours will grow about 1% on average per year during 2008 through 2010, excluding the effects of weather variations. We currently expect our retail sales growth in 2008 to be below average because of potential effects on customer usage from economic conditions and retail rate increases (see Note 5).
     Actual sales growth, excluding weather-related variations, may differ from our projections as a result of numerous factors, such as economic conditions, customer growth, usage patterns and responses to retail price changes. Our experience indicates that a reasonable range of variation in our kilowatt-hour sales projection attributable to such economic factors can result in increases or decreases in annual net income of up to $10 million.
      Weather In forecasting retail sales growth, we assume normal weather patterns based on historical data. Historical extreme weather variations have resulted in annual variations in net income in excess of $20 million. However, our experience indicates that the more typical variations from normal weather can result in increases or decreases in annual net income of up to $10 million.
      Wholesale Market Our marketing and trading activities focus primarily on managing APS’ risks relating to fuel and purchased power costs in connection with its costs of serving Native Load customer demand. Our marketing and trading activities include, subject to specified parameters, marketing, hedging and trading in electricity, fuels and emission allowances and credits. See “Rate Requests for Transmission and Ancillary Services” in Note 5 for information regarding APS’ filing with the FERC requesting an increase in transmission rates.
Other Factors Affecting Financial Results
      Operations and Maintenance Expenses Operations and maintenance expenses are impacted by growth, power plant operations, maintenance of utility plant (including generation, transmission, and distribution facilities), inflation, outages, higher-trending pension and other postretirement benefit costs and other factors.
      Depreciation and Amortization Expenses Depreciation and amortization expenses are impacted by net additions to utility plant and other property (such as new generation, transmission, and distribution facilities), and changes in depreciation and amortization rates. See “Capital Expenditure Requirements” above for information regarding planned additions to our facilities.
      Property Taxes Taxes other than income taxes consist primarily of property taxes, which are affected by the value of property in-service and under construction, assessment ratios, and tax rates. The average property tax rate for APS, which currently owns the majority of our property, was 8.3% of the assessed value for 2007 and 8.9% of assessed value for 2006. We expect property taxes to increase as we add new utility plant (including new generation, transmission and distribution facilities) and as we
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improve our existing facilities. See “Capital Expenditure Requirements” above for information regarding planned additions to our facilities.
      Interest Expense Interest expense is affected by the amount of debt outstanding and the interest rates on that debt. The primary factors affecting borrowing levels are expected to be our capital expenditures, long-term debt maturities, and internally generated cash flow. Capitalized interest offsets a portion of interest expense while capital projects are under construction. We stop accruing capitalized interest on a project when it is placed in commercial operation.
      Retail Competition Although some very limited retail competition existed in Arizona in 1999 and 2000, there are currently no active retail electric service providers providing unbundled energy or other utility services to APS’ customers. We cannot predict when, and the extent to which, additional electric service providers will re-enter APS’ service territory.
      Subsidiaries SunCor’s net income was $24 million in 2007, $61 million in 2006 and $56 million in 2005. See Note 17 for further discussion. We currently expect minimal contributions from SunCor in 2008. This estimate reflects the weak real estate market.
     The historical results of APSES, Pinnacle West Marketing & Trading and El Dorado are not indicative of future performance.
      General Our financial results may be affected by a number of broad factors. See “Forward-Looking Statements” below for further information on such factors, which may cause our actual future results to differ from those we currently seek or anticipate.
Market Risks
     Our operations include managing market risks related to changes in interest rates, commodity prices and investments held by our nuclear decommissioning trust fund.
      Interest Rate and Equity Risk
     We have exposure to changing interest rates. Changing interest rates will affect interest paid on variable-rate debt and the market value of fixed income securities held by our nuclear decommissioning trust fund. The nuclear decommissioning trust fund also has risks associated with the changing market value of its investments. Nuclear decommissioning costs are recovered in regulated electricity prices.
      Commodity Price Risk
     We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas and emissions allowances. Our ERMC, consisting of officers and key management personnel, oversees company-wide energy risk management activities and monitors the results of marketing and trading activities to ensure compliance with our stated energy risk management and trading policies. We manage risks associated with these market fluctuations by utilizing various commodity instruments that qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. As part of our risk management program, we use such instruments to hedge purchases and sales of electricity, fuels and emissions allowances and credits. The changes in market value of such contracts have a high correlation to price changes in the hedged commodities.
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     The following tables show the net pretax changes in mark-to-market value of our derivative positions for the six months ended June 30, 2008 and 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	 	
 	 	June 30,	 	
 	 	2008	 	 	2007	 	
Mark-to-market of net positions at beginning of period	 	$	40	 	 	$	15	 	
Recognized in earnings:	 	 	 	 	 	 	 	 	
Change in mark-to-market gains for future period deliveries	 	 	32	 	 	 	19	 	
Mark-to-market gains realized including ineffectiveness during the period	 	 	(3	)	 	 	(21	)	
Decrease in regulatory asset	 	 	178	 	 	 	34	 	
Recognized in OCI:	 	 	 	 	 	 	 	 	
Change in mark-to-market gains for future period deliveries (a)	 	 	361	 	 	 	30	 	
Mark-to-market gains realized during the period	 	 	(39	)	 	 	(18	)	
Change in valuation techniques	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	
Mark-to-market of net positions at end of period	 	$	569	 	 	$	59	 	

			
(a)	 	The increase is primarily due to increases in forward natural gas prices.	
     The table below shows the net fair value of maturities of our derivative contracts (dollars in millions) at June 30, 2008 by yearly maturities and by the type of valuation that is performed to calculate the fair values. See Note 1, “Derivative Accounting,” in Item 8 of our 2007 Form 10-K and Note 20 for more discussion of our valuation methods.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Years	 	 	Total	 	
Source of Fair Value	 	2008	 	 	2009	 	 	2010	 	 	2011	 	 	2012	 	 	thereafter	 	 	fair value	 	
Level 1 — Quoted prices in active markets	 	$	118	 	 	$	54	 	 	$	2	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	174	 	
Level 2 — Significant other observable inputs	 	 	82	 	 	 	167	 	 	 	101	 	 	 	38	 	 	 	—	 	 	 	—	 	 	 	388	 	
Level 3 — Significant unobservable inputs	 	 	(5	)	 	 	(5	)	 	 	(2	)	 	 	1	 	 	 	9	 	 	 	9	 	 	 	7	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total by maturity	 	$	195	 	 	$	216	 	 	$	101	 	 	$	39	 	 	$	9	 	 	$	9	 	 	$	569	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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     The table below shows the impact that hypothetical price movements of 10% would have on the market value of our risk management and trading assets and liabilities included on Pinnacle West’s Condensed Consolidated Balance Sheets at June 30, 2008 and December 31, 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	June 30, 2008	 	 	December 31, 2007	 	
 	 	Gain (Loss)	 	 	Gain (Loss)	 	
 	 	 	 	 	 	Price Down	 	 	 	 	 	 	Price Down	 	
 	 	Price Up 10%	 	 	10%	 	 	Price Up 10%	 	 	10%	 	
Mark-to-market changes reported in:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electricity	 	$	(9	)	 	$	9	 	 	$	3	 	 	$	(3	)	
Natural gas	 	 	19	 	 	 	(19	)	 	 	4	 	 	 	(4	)	
Regulatory asset (liability) or OCI (a)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electricity	 	 	45	 	 	 	(45	)	 	 	45	 	 	 	(45	)	
Natural gas	 	 	131	 	 	 	(131	)	 	 	85	 	 	 	(85	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	186	 	 	$	(186	)	 	$	137	 	 	$	(137	)	

			
(a)	 	These contracts are hedges of our forecasted purchases of natural gas and electricity. The impact of these hypothetical price movements would substantially offset the impact that these same price movements would have on the physical exposures being hedged. To the extent the amounts are eligible for inclusion in the PSA, the amounts are recorded as either a regulatory asset or liability.	
Credit Risk
     We are exposed to losses in the event of non-performance or non-payment by counterparties. See Note 1, “Derivative Accounting” in Item 8 of our 2007 Form 10-K for a discussion of our credit valuation adjustment policy. See Note 10 for further discussion of credit risk.
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ARIZONA PUBLIC SERVICE COMPANY — RESULTS OF OPERATIONS
Operating Results — Three-month period ended June 30, 2008 compared with three-month period ended June 30, 2007
     Our consolidated net income for the three months ended June 30, 2008 was $125 million compared with net income of $75 million for the comparable prior-year period. Net income increased approximately $50 million due to various factors, including income tax benefits of $29 million related to prior years resolved in 2008; the impacts of retail and transmission rate increases; increased mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals; a regulatory disallowance in 2007; increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts; and higher retail sales primarily due to customer growth. These positive factors were partially offset by the effects of milder weather on retail sales; higher operations and maintenance expense primarily related to distribution system reliability, generation costs (including planned maintenance and overhauls), and other costs; and higher depreciation and amortization primarily due to higher plant balances.
     Additional details on the major factors that increased (decreased) net income for the three-month period ended June 30, 2008 compared with the prior-year period are contained in the following table (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Increase (Decrease)	 	
 	 	Pretax	 	 	After Tax	 	
Impacts of retail rate increase effective July 1, 2007 and transmission rate increase effective March 1, 2008:	 	 	 	 	 	 	 	 	
Retail revenue increase primarily related to higher Base Fuel Rate	 	$	93	 	 	$	57	 	
Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate	 	 	(76	)	 	 	(46	)	
Transmission rate increase (including a retail rate component)	 	 	7	 	 	 	4	 	
Higher mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals	 	 	17	 	 	 	10	 	
Regulatory disallowance in 2007	 	 	14	 	 	 	8	 	
Increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts	 	 	7	 	 	 	4	 	
Higher retail sales primarily due to customer growth, excluding weather effects	 	 	6	 	 	 	4	 	
Effects of milder weather on retail sales	 	 	(18	)	 	 	(11	)	
Higher operations and maintenance expense primarily related to distribution system reliability, increased generation costs (including planned maintenance and overhauls), and other costs	 	 	(12	)	 	 	(7	)	
Higher depreciation and amortization primarily due to higher plant balances	 	 	(5	)	 	 	(3	)	
Income tax benefits related to prior years resolved in 2008	 	 	—	 	 	 	29	 	
Miscellaneous items, net	 	 	(6	)	 	 	1	 	
 	 	 	 	 	 	 	
Increase in net income	 	$	27	 	 	$	50	 	
 	 	 	 	 	 	 	
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     Electric operating revenues were $109 million higher for the three months ended June 30, 2008 compared with the prior-year period primarily because of:

 	•	 	a $93 million increase in retail revenues due to a rate increase effective July 1, 2007;	
 		
 	•	 	a $20 million increase in revenues from Off-System Sales due to higher prices and volumes;	
 		
 	•	 	a $13 million increase in revenues related to long-term traditional wholesale contracts;	
 		
 	•	 	an $8 million increase in retail revenues primarily related to customer growth, excluding weather effects;	
 		
 	•	 	a $7 million increase due to a transmission rate increase (including a retail rate component) effective March 1, 2008;	
 		
 	•	 	a $24 million decrease in retail revenue due to the effects of milder weather; and	
 		
 	•	 	an $8 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because of amortization of the same amount recorded as fuel and purchased power expense.	
Operating Results — Six-month period ended June 30, 2008 compared with six-month period ended June 30, 2007
     Our net income for the six months ended June 30, 2008 was $119 million compared with net income of $79 million for the comparable prior-year period. Net income increased approximately $40 million due to various factors, including income tax benefits of $29 million related to prior years resolved in 2008; the impacts of retail and transmission rate increases; increased mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals; a regulatory disallowance in 2007; higher retail sales primarily due to customer growth; and increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts. These positive factors were partially offset by higher operations and maintenance expense primarily related to increased generation costs, (including planned maintenance and overhauls), increased costs related to distribution system reliability and other costs; the effects of milder weather on retail sales; and higher depreciation and amortization primarily due to higher plant balances.
     Additional details on the major factors that increased (decreased) net income for the six-month period ended June 30, 2008 compared with the prior-year period are contained in the following table (dollars in millions):
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 	 	Increase (Decrease)	 	
 	 	Pretax	 	 	After Tax	 	
Impacts of retail rate increase effective July 1, 2007 and transmission rate increase effective March 1, 2008:	 	 	 	 	 	 	 	 	
Retail revenue increase primarily related to higher Base Fuel Rate	 	$	156	 	 	$	95	 	
Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate	 	 	(141	)	 	 	(86	)	
Transmission rate increase (including a retail rate component)	 	 	10	 	 	 	6	 	
Higher mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals	 	 	26	 	 	 	16	 	
Regulatory disallowance in 2007	 	 	14	 	 	 	8	 	
Higher retail sales primarily due to customer growth, excluding weather effects	 	 	12	 	 	 	7	 	
Increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts	 	 	11	 	 	 	7	 	
Effects of milder weather on retail sales	 	 	(19	)	 	 	(12	)	
Operations and maintenance expense increases primarily due to:	 	 	 	 	 	 	 	 	
Increased customer service and other costs as a result of distribution system reliability	 	 	(18	)	 	 	(11	)	
Increased generation costs, including more planned maintenance and overhauls	 	 	(15	)	 	 	(9	)	
Higher depreciation and amortization primarily due to higher plant balances	 	 	(11	)	 	 	(7	)	
Income tax benefits related to prior years resolved in 2008	 	 	—	 	 	 	29	 	
Miscellaneous items, net	 	 	(7	)	 	 	(3	)	
 	 	 	 	 	 	 	
Increase in net income	 	$	18	 	 	$	40	 	
 	 	 	 	 	 	 	
     Electric operating revenues were $197 million higher for the six months ended June 30, 2008 compared with the prior-year period primarily because of:

 	•	 	a $156 million increase in retail revenues due to a rate increase effective July 1, 2007;	
 		
 	•	 	a $37 million increase in revenues from Off-System Sales due to higher prices and volumes;	
 		
 	•	 	a $20 million increase in revenues related to long-term traditional wholesale contracts;	
 		
 	•	 	a $16 million increase in retail revenues primarily related to customer growth, excluding weather effects;	
 		
 	•	 	a $10 million increase due to a transmission rate increase (including a retail rate component) effective March 1, 2008;	
 		
 	•	 	a $26 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because of amortization of the same amount recorded as fuel and purchased power expense;	
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 	•	 	a $25 million decrease in retail revenue due to the effects of milder weather; and	
 		
 	•	 	a $9 million net increase due to miscellaneous factors.	
ARIZONA PUBLIC SERVICE COMPANY — LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
     The following table presents net cash provided by (used for) operating, investing and financing activities for the six months ended June 30, 2008 and 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Six Months Ended	
 	 	June 30,	
 	 	2008	 	2007	
Net cash flow provided by operating activities	 	$	686	 	 	$	334	 	
Net cash flow used for investing activities	 	 	(457	)	 	 	(396	)	
Net cash flow used for financing activities	 	 	(196	)	 	 	(18	)	
     The increase of approximately $352 million in net cash provided by operating activities is primarily due to increased collateral and margin cash collected from counterparties as a result of changes in commodity prices and increased retail revenue related to higher Base Fuel Rates. These positive factors were partially offset by changes in working capital.
     The increase of approximately $61 million in net cash used for investing activities is primarily due to lower cash proceeds from the sale of investment securities at APS and higher levels of capital expenditures (see table and discussion above).
     The increase of approximately $178 million in net cash used for financing activities is primarily due to lower levels of short-term debt as a result of higher cash from operations.
      Contractual Obligations
     APS’ future contractual obligations related to fuel and purchased power contracts have increased from approximately $3.0 billion at December 31, 2007 to $8.1 billion at June 30, 2008 as follows (dollars in billions):
 	 	 	 	 	 	 	 	 	
2008	 	2009–2010	 	2011–2012	 	Thereafter	 	Total	
$0.6	 	$0.7	 	$0.6	 	$6.2	 	$8.1	
     This increase is primarily due to contingent obligations related to renewable energy contracts, primarily the 280MW solar project described in “Portfolio Resources – Alternative Generation Sources” in Part I, Item 1 of the 2007 Form 10-K.
     See Note 4 for a list of APS’ payments due on total long-term debt and capitalized lease requirements.
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FORWARD-LOOKING STATEMENTS
     This document contains forward-looking statements based on current expectations, and neither Pinnacle West nor APS assumes any obligation to update these statements or make any further statements on any of these issues, except as required by applicable law. These forward-looking statements are often identified by words such as “estimate,” “predict,” “hope,” “may,” “believe,” “anticipate,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or from results or outcomes currently expected or sought by Pinnacle West or APS. In addition to the Risk Factors described in Item 1A of the 2007 Form 10-K, these factors include, but are not limited to:

 	•	 	state and federal regulatory and legislative decisions and actions, including the outcome or timing of our pending rate cases;	
 		
 	•	 	the outcome of regulatory, legislative and judicial proceedings, both current and future, including those related to environmental matters and climate change;	
 		
 	•	 	our ability to reduce capital expenditures and other costs while maintaining reliability and customer service levels, and unexpected developments that would limit us from achieving all or some of our planned capital expenditure reductions;	
 		
 	•	 	the potential for additional restructuring of the electric industry, including decisions impacting wholesale competition and the introduction of retail electric competition in Arizona;	
 		
 	•	 	fluctuations in market prices for electricity, natural gas, coal, uranium and other fuels used in our generating facilities, and supplies of such commodities;	
 		
 	•	 	volatile market liquidity, any deteriorating counterparty credit and the use of derivative contracts in our business (including the interpretation of the subjective and complex accounting rules related to these contracts);	
 		
 	•	 	power plant performance and outages;	
 		
 	•	 	transmission outages and constraints;	
 		
 	•	 	weather variations affecting local and regional customer energy usage;	
 		
 	•	 	customer growth and energy usage;	
 		
 	•	 	national and regional economic and market conditions, including the strength of the housing and credit markets, volatile fuel and purchased power costs, the completion of generation and transmission construction in the region, which could affect customer growth and the cost of power supplies, and the results of litigation and other proceedings resulting from the California and Pacific Northwest energy situations;	
 		
 	•	 	ability of power plant participants to meet contractual or other obligations;	
 		
 	•	 	the cost of debt and equity capital and access to capital markets;	
 		
 	•	 	current credit ratings remaining in effect for any given period of time;	
 		
 	•	 	changes in accounting principles generally accepted in the United States of America and the interpretation of those principles;	
 		
 	•	 	the performance of the stock market and the changing interest rate environment, which affect the value of our nuclear decommissioning trusts, pension and other postretirement benefit plan assets, the amount of required contributions to Pinnacle West’s pension plan and contributions to APS’ nuclear decommissioning trust funds, as well as the reported costs of providing pension and other postretirement benefits;	
 		
 	•	 	technological developments in the electric industry;	
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 	•	 	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.	

Item 3.	 	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	
     See “Pinnacle West Consolidated – Factors Affecting Our Financial Outlook” in Item 2 above for a discussion of quantitative and qualitative disclosures about market risks.
Item 4. CONTROLS AND PROCEDURES
     (a) Disclosure Controls and Procedures
     The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (15 U.S.C. 78a et seq .), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
     Pinnacle West’s management, with the participation of Pinnacle West’s Chief Executive Officer and Principal Financial Officer, have evaluated the effectiveness of Pinnacle West’s disclosure controls and procedures as of June 30, 2008. Based on that evaluation, Pinnacle West’s Chief Executive Officer and Principal Financial Officer have concluded that, as of that date, Pinnacle West’s disclosure controls and procedures were effective.
     APS’ management, with the participation of APS’ Chief Executive Officer and Principal Financial Officer, have evaluated the effectiveness of APS’ disclosure controls and procedures as of June 30, 2008. Based on that evaluation, APS’ Chief Executive Officer and Principal Financial Officer have concluded that, as of that date, APS’ disclosure controls and procedures were effective.
     (b) Changes in Internal Control Over Financial Reporting
     The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
     No change in Pinnacle West’s or APS’ internal control over financial reporting occurred during the fiscal quarter ended June 30, 2008 that materially affected, or is reasonably likely to materially affect, Pinnacle West’s or APS’ internal control over financial reporting.
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Part II — OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
     See Note 12 in regard to pending or threatened litigation or other disputes. See also “Superfund” under Item 5 below.
Item 1A. RISK FACTORS
     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the 2007 Form 10-K, which could materially affect the business, financial condition, cash flows or future results of APS and Pinnacle West. The risks described in the 2007 Form 10-K are not the only risks facing APS and Pinnacle West. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect the business, financial condition, cash flows and/or operating results of APS and Pinnacle West.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Proposal 1 — Election of Directors
     At our Annual Meeting of Shareholders held on May 21, 2008, the following persons were elected as directors:
 	 	 	 	 	 	 	
Directors (Term to expire at	 	 	 	 	 	Abstentions and Broker	
2009 Annual Meeting)	 	Votes For	 	Votes Withheld	 	Non-Votes	
Edward N. Basha, Jr.	 	83,924,952	 	2,108,316	 	N/A	
Susan Clark-Johnson	 	83,949,841	 	2,083,427	 	N/A	
Michael L. Gallagher	 	76,015,352	 	10,017,916	 	N/A	
Pamela Grant	 	83,785,638	 	2,247,630	 	N/A	
Roy A. Herberger, Jr.	 	83,806,434	 	2,226,834	 	N/A	
William S. Jamieson	 	83,795,031	 	2,238,237	 	N/A	
Humberto S. Lopez	 	83,802,444	 	2,230,824	 	N/A	
Kathryn L. Munro	 	84,037,198	 	1,996,070	 	N/A	
Bruce J. Nordstrom	 	84,035,321	 	1,997,947	 	N/A	
W. Douglas Parker	 	83,646,676	 	2,386,592	 	N/A	
William J. Post	 	83,850,519	 	2,182,749	 	N/A	
William L. Stewart	 	83,906,592	 	2,126,676	 	N/A	
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Proposal 2 — Amend the Articles of Incorporation to Provide for Majority Shareholder Vote to Approve Certain Actions
     At the same meeting, a Company proposal requesting that the Articles of Incorporation be amended to eliminate the two-thirds voting requirement for certain actions was submitted to the shareholders, and the voting was as follows:
 	 	 	 	 	 	 	
Company proposal to provide for	 	 	 	 	 	 	
majority shareholder vote to	 	 	 	 	 	 	
approve certain actions including	 	 	 	 	 	 	
amending the Articles of	 	 	 	 	 	Abstentions and	
Incorporation	 	Votes For	 	Votes Against	 	Broker Non-Votes	
 	 	82,536,970	 	1,766,992	 	1,729,305	
Proposal 3 — Independent Auditors
     At the same meeting, a proposal for the ratification of the selection of Deloitte & Touche LLP as independent auditors of the Company for the fiscal year ending 2008 was submitted to the shareholders, and the voting was as follows:
 	 	 	 	 	 	 	
Proposal for the ratification	 	 	 	 	 	 	
of the selection of Deloitte &	 	 	 	 	 	 	
Touche LLP for the fiscal year	 	 	 	 	 	Abstentions and	
ending 2008	 	Votes For	 	Votes Against	 	Broker Non-Votes	
 	 	84,637,340	 	1,190,613	 	205,315	
Item 5. OTHER INFORMATION
Construction and Financing Programs
     See “Liquidity and Capital Resources” in Part I, Item 2 of this report for a discussion of construction and financing programs of the Company and its subsidiaries.
Regulatory Matters
     See Note 5 for a discussion of regulatory developments.
Environmental Matters
      Superfund
     See “Superfund” in Note 12 for a discussion of a Superfund site.
     By letter dated April 25, 2008, the EPA informed APS that it may be a PRP in the Gila River Indian Reservation Superfund Site in Maricopa County, Arizona. APS, along with three other electric utility companies, owns a parcel of property on which a transmission pole and a portion of a transmission line are located. The property abuts the Gila River Indian Community boundary and, at one time, may
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have been part of an airfield where crop dusting took place. Currently, the EPA is only seeking payment from APS and four other PRPs for past cleanup-related costs involving contamination from the crop dusting. Based upon the total amount of cleanup costs reported by the EPA in its letter to APS, we do not expect that the resolution of this matter will have a material adverse impact on our financial position, results of operations, or cash flows.
      Mercury
     On March 15, 2005, the EPA issued the Clean Air Mercury Rule (CAMR) to control mercury emissions from coal-fired power plants.  This rule established performance standards limiting mercury emissions from coal-fired power plants and established a two phased market-based emissions trading program.  Under the trading program, the EPA assigned each state a mercury emissions “budget” and each state was required to submit to the EPA a plan detailing how it will meet its “budget.”
     In November 2006, ADEQ submitted a State Implementation Plan (“SIP”) to the EPA to implement the CAMR.  ADEQ’s SIP generally incorporated the EPA’s model cap-and-trade program, but it included additional requirements, including the requirement to meet a 90% mercury removal control level or 0.0087 lbs/GWh, whichever is greater, the requirement to obtain mercury allowances at a 2:1 ratio for any emissions that fall below the specified control level, and the requirement, beginning in 2013, to consider clean coal technologies as part of permitting any new generation.
     On February 8, 2008, the U.S. Court of Appeals for the D.C. Circuit vacated the CAMR and the EPA rule that allowed for the creation of the CAMR and, on March 14, 2008, the court issued the mandate to vacate these rules.  On May 20, 2008, the D.C. Circuit denied EPA’s request to reconsider its decision.   EPA is now considering an appeal to the Supreme Court. Unless and until this decision is overturned, the law in effect prior to the adoption of the CAMR becomes the applicable law, and requires the EPA to develop an emission limit for mercury that represents the maximum achievable control technology (“MACT”).  It is expected to take the EPA several years to establish such a standard, followed by a period of several years during which existing plants would implement any controls needed to comply with the standard.
     The court’s ruling also invalidates CAMR-based portions of ADEQ’s mercury rule (the trading provisions of the rule), although the state-only emission limits remain in effect.  On July 25, 2008, the Arizona Utilities Group (comprised of APS, Arizona Electric Power Cooperative, Salt River Project, Tucson Electric Power Company, and Tri-State Generation and Transmission Association) filed with ADEQ a Petition for Reconsideration and Repeal of the state mercury rule. The petition asserts that ADEQ does not have statutory authority to administer and enforce the state mercury rule, in light of the vacatur of the CAMR and the requirement that EPA promulgate a MACT standard.
     While we continue to monitor this matter, we cannot predict the final outcome of the court’s proceeding (if an appeal is filed), the response of ADEQ to the court’s decision or to the petition, or the scope, timing or impact of any alternate rules that may be enacted to address mercury emissions.
     We have installed, and continue to install, certain of the equipment necessary to meet the current mercury standards.  However, due to the recent U.S. Court of Appeals decision described above, we will monitor the type and timing of any necessary equipment installation.  The estimated costs expected to be incurred over the next three years for such equipment are included in our environmental expenditure estimates (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Expenditures” in Part I, Item 2).
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Item 6. EXHIBITS
(a) Exhibits
 	 	 	 	 	
Exhibit No.	 	Registrant(s)	 	Description	
 	 	 	 	 	
3.1	 	Pinnacle West	 	Articles of Incorporation, restated as of May 21, 2008	
 	 	 	 	 	
10.1 a	 	Pinnacle West
APS	 	Letter Agreement dated June 17, 2008 between Pinnacle West/APS and James R. Hatfield	
 	 	 	 	 	
10.2 a	 	Pinnacle West	 	Description of Annual Stock Grants to Non-Employee Directors	
 	 	 	 	 	
10.3 a	 	APS	 	Letter Agreement dated July 22, 2008 between APS and Randall K. Edington	
 	 	 	 	 	
10.4 ab	 	Pinnacle West	 	Form of Restricted Stock Agreement Under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	
 	 	 	 	 	
10.5 ab	 	Pinnacle West	 	Form of Performance Share Agreement Under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	
 	 	 	 	 	
10.6 ab	 	Pinnacle West	 	Form of Restricted Stock Unit Agreement Under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan	
 	 	 	 	 	
10.7 a	 	APS	 	Description of 2008 Palo Verde Specific Compensation Opportunity for Randall K. Edington	
 	 	 	 	 	
12.1	 	Pinnacle West	 	Ratio of Earnings to Fixed Charges	
 	 	 	 	 	
12.2	 	APS	 	Ratio of Earnings to Fixed Charges	
 	 	 	 	 	
12.3	 	Pinnacle West	 	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements	

a	 	Management contract or compensatory plan or arrangement filed as an exhibit pursuant to Item 6 of Form 10-Q.	
 		
b	 	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.	
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Exhibit No.	 	Registrant(s)	 	Description	
 	 	 	 	 	
31.1	 	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	
 	 	 	 	 	
31.2	 	Pinnacle West	 	Certificate of Donald E. Brandt, President and Principal Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
 	 	 	 	 	
31.3	 	APS	 	Certificate of Donald E. Brandt, President, Chief Executive Officer and Principal Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
 	 	 	 	 	
32.1	 	Pinnacle West	 	Certification of Chief Executive Officer, President and Principal Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	 	 	 	 	
32.2	 	APS	 	Certification of Chief Executive Officer, President and Principal Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
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     In addition, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation §229.10(d) by reference to the filings set forth below:
 	 	 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	Previously Filed as	 	Date	
No.	 	Registrant(s)	 	Description	 	Exhibit 1	 	Filed	
 	 	 	 	 	 	 	 	 	
3.2	 	Pinnacle West	 	Pinnacle West Capital Corporation Bylaws, amended as of May 23, 2007	 	4.2 to Pinnacle West/APS May 23, 2007 Form 8-K Report, File Nos. 1-8962 and 1-4473	 	5-25-07	
 	 	 	 	 	 	 	 	 	
3.3	 	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	 	9-29-93	
 	 	 	 	 	 	 	 	 	
3.4	 	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	 	8-9-04	

1	 	Reports filed under File Nos. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C.	
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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 	 	 	 	 	
 	PINNACLE WEST CAPITAL CORPORATION
     (Registrant)
 	 	
Dated: August 7, 2008 	By:  	/s/  Donald E. Brandt 	 	
 	 	Donald E. Brandt 	 	
 	 	President and Chief Operating Officer
(Principal Financial Officer and
Officer Duly Authorized to sign this Report) 	 	
 	
 	ARIZONA PUBLIC SERVICE COMPANY
     (Registrant)
 	 	
Dated: August 7, 2008 	By:  	/s/  Donald E. Brandt 	 	
 	 	Donald E. Brandt 	 	
 	 	President and Chief Executive Officer
(Principal Financial Officer and
Officer Duly Authorized to sign this Report) 	 	
 	
 74 

Exhibit 3.1
RESTATED ARTICLES OF INCORPORATION
OF
PINNACLE WEST CAPITAL CORPORATION
(RESTATED AS OF MAY 21, 2008)
      FIRST : The name of the corporation is Pinnacle West Capital Corporation.
      SECOND : The corporation is organized for the purpose of transacting any or all lawful business for which corporations may be incorporated under Chapter 1 of Title 10, Arizona Revised Statutes, as at any time in effect. The character of business that the corporation initially intends to conduct is the acquisition and holding of securities of other corporations for investment purposes.
      THIRD : The aggregate number of shares that the corporation shall have authority to issue is 160,000,000 divided into 150,000,000 shares of Common Stock, no par value, and 10,000,000 shares of Serial Preferred Stock, no par value. Each issued and outstanding share of Common Stock will entitle the holder thereof to one vote, except as may otherwise be provided by statute. Issued and outstanding shares of Serial Preferred Stock will entitle the holders thereof only to those votes, if any, that may expressly be fixed as hereinafter provided for the respective series thereof or as may otherwise be provided by statute.
     The Board of Directors is authorized to provide from time to time for the issuance of shares of Serial Preferred Stock in series and to fix from time to time before issuance the designation, preferences, privileges and voting powers of the shares of each series of Serial Preferred Stock and the restrictions or qualifications thereof, including, without limiting the generality of the foregoing, the following:
     (a) The serial designation and authorized number of shares;
     (b) The dividend rate, if any, the date or dates on which such dividends will be payable, and the extent to which such dividends may be cumulative;
     (c) The price or prices at which shares may be redeemed, and any terms, conditions and limitations upon such redemptions;
     (d) The amount or amounts to be received by the holders in the event of voluntary or involuntary dissolution or liquidation of the corporation;
     (e) Any sinking fund provisions for redemption or purchase of shares of such series;
     (f) The terms and conditions, if any, on which shares may be converted into shares of other capital stock, or of other series of Serial Preferred Stock, of the corporation; and
     (g) The voting rights, if any, for the shares of such series.

 

      FOURTH : The name and street address of the current statutory agent of the corporation is CT Corporation System, 2394 East Camelback Road, Phoenix, AZ 85016. The street address of the known place of business of the corporation is 400 North 5 th Street, Phoenix, Arizona 85004.
      FIFTH : The Board of Directors of the corporation shall consist of not less than 9 nor more than 21 shareholders of the corporation or of any parent corporation thereof. Each director shall hold such office until the next annual meeting of the shareholders or until his or her earlier death, resignation or removal. The foregoing notwithstanding, each director shall serve until his or her successor is duly elected and qualified.
     Except to fill vacancies resulting from the death or resignation of a director and except for nominations by the Board of Directors or a committee thereof, nominations for directors must be made in writing at least 180 days prior to the date of the shareholders’ meeting at which the election is to occur.
      SIXTH : The corporation shall have the right to purchase, directly or indirectly, its own shares to the extent of the unreserved and unrestricted earned and capital surplus available therefor.
      SEVENTH : The Board of Directors may, from time to time, distribute on a pro rata basis to its shareholders out of capital surplus of the corporation a portion of its assets, in cash or property, and no shareholder authorization thereof shall be required.
      EIGHTH : The corporation may create and issue rights or options to directors, officers or employees of the corporation or of any affiliate thereof, entitling the holders thereof to purchase from the corporation shares of any class or classes, and no shareholder approval or ratification thereof shall be required.
      NINTH : The corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation.
      TENTH : A director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability for any of the following:
     (a) any breach of the director’s duty of loyalty to the corporation or its shareholders;
     (b) acts or omissions which are not in good faith or which involve intentional misconduct or a knowing violation of law;
     (c) any authorization of an unlawful payment of a dividend or other distribution on the corporation’s capital stock or the unlawful purchase of its capital stock;
     (d) any transaction from which the director derived an improper personal benefit; or
     (e) a violation of Arizona Revised Statutes Section 10-041.

 

     If the Arizona General Corporation Law is amended after the date of these Articles of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, the liability of a director of the corporation shall be eliminated or limited to the full extent permitted by the Arizona General Corporation Law, as amended.
     Any repeal or modification of this Article TENTH shall not increase the personal liability of any director of the corporation for any act or occurrence taking place prior to such repeal or modification or otherwise adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification.
     The provisions of this Article TENTH shall not be deemed to limit or preclude indemnification of a director by the corporation for any liability of a director which has not been eliminated by the provisions of this Article TENTH.

Exhibit 10.1

 	 	A subsidiary of Pinnacle West Capital Corporation	 	 	
 		
 	 	Donald E. Brandt	 	Tel 602/250-5602	 	Mail Station 9042	
 	 	President and Chief Executive Officer	 	Fax 602/250-3303	 	PO Box 53999	
 	 	 	 	 	 	Phoenix, AZ 85072-3999	
June 17, 2008
Mr. James R. Hatfield
6300 N.E. 109 th Street
Edmond, OK 73013
Dear Jim,
I am delighted to extend to you this offer to become the Senior Vice President & Chief Financial Officer of both Pinnacle West Capital Corporation and Arizona Public Service Company. The details of our proposal are included in Attachment A.
If you are in agreement with the terms of our offer of employment as described herein, please sign as requested below.
Jim, I am confident that this will be a challenging and rewarding opportunity for you. Bill Post and I are excited about the prospect of you joining our team and we will personally do all we can to ease your and your family’s transition. We look forward to your contributions to our organization.
If you have any questions, please do not hesitate to contact me.
Sincerely,
/s/ Donald E. Brandt
DB08-07/ps
Signing this letter indicates your acceptance of the terms of this offer.
 	 	 	 	 	 	 	
Acceptance: 	 	/s/ James R. Hatfield
 	 	Date: 6/18/08	 		

 

Attachment A

•	 	Annual base salary of $450,000.	
 		
•	 	Hiring incentive of $200,000 payable during the first two weeks of your employment, and $100,000 paid within two weeks of the first anniversary of your employment date.	
 		
•	 	4 weeks vacation annually	
 		
•	 	Vehicle allowance of $10,000 per year	
 		
•	 	Participation in the officer annual incentive plan with a target payment of 50% and up to a maximum of 100% of annual base salary. Annual incentive payments are dependent on company and business unit performance and are generally paid during the first quarter of the subsequent year. Incentive for 2008 will be prorated based on employment date.	
 		
•	 	Long-Term Stock Based Compensation: Typically awarded annually, with the average base award for senior vice presidents representing a target equity face value of approximately $260,000 that vests over four years.	

 	o	 	At the next Human Resources Committee meeting following your hire date, the Committee will be asked to approve: (1) an award of 1,400 performance shares which will vest on 2/1/2009; (2) an award of 2,000 performance shares which will vest on 2/1/2010; (3) an award of 3,400 performance shares which will vest on 2/1/2011; (4) an award of 2,500 restricted stock units that will vest through 2/1/2011 and (5) an award of 3,500 restricted stock units that will vest through 2/1/2012. The intent of these awards is to establish your standing on a pro-rata basis within the three long-term performance cycles that are currently running for other officers.	

•	 	Participation in the Supplemental Executive Retirement Plan. The SEBRP is structured as a cash balance plan that the company contributes a percent of your base and annual incentive compensation as follows:	
 	 	 	 	 	
 	 	Percent of Monthly	
Age	 	Compensation Contribution	
40–44	 	 	16	%	
45–49	 	 	20	%	
50–54	 	 	24	%	
55 and over	 	 	28	%	

•	 	Financial planning benefit of $7,500 the first year utilized and $3,750 each subsequent year.	
 -1- 

 

•	 	Deferred Compensation Plan (DCP):	

 	o	 	The DCP provides you with the opportunity to defer part of your compensation on a pre-tax basis. The deferred amount also earns interest. The company sets the interest amount each calendar year. (For the last several years, the interest rate has been 7.5%)	

•	 	Historically, we have provided officers with Key Executive Employment & Severance Agreements for change of control purposes. In the event of payment under this plan, you would receive 2.99 times base salary and annual incentive as described in the document.	
 		
•	 	If you enroll in the company’s benefit program within the first 30 days of employment, your medical, dental, and life insurance will be effective on your one-month anniversary date of employment. Medical and dental plan premiums are on a pre-tax basis. We will provide you with a payment equal to the cost of your OGE COBRA coverage (grossed up for taxes) to bridge your medical coverage until the effective date of your coverage under the Pinnacle and APS plan.	
 		
•	 	Relocation benefits will include household goods transportation and storage, temporary living up to six months or longer if business needs arise, and home sale and home finding assistance. So as to facilitate and expedite your relocation, you may elect any home sale option under our executive relocation program without regard to any time periods that generally apply.	
All items of compensation, and all benefits, that are provided pursuant to a compensation or benefit plan will be subject to the terms and provisions of the relevant plan.
This offer is contingent upon successful completion of a pre-employment medical screening and background check.
 -2- 

Exhibit 10.2
Description of Annual Stock Grants to Non-Employee Directors
     Annual common stock grants to non-employee directors are made pursuant to the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan (the “2007 Plan”). The Human Resources Committee of Pinnacle West’s Board of Directors has approved annual grants of Pinnacle West common stock to non-employee directors under the 2007 Plan as follows:
     Each Pinnacle West non-employee director will annually receive 1,600 shares of Pinnacle West common stock under the 2007 Plan on the first business day of July, beginning July 1, 2008, subject to the following restrictions: In the first calendar year in which a non-employee director is eligible to participate in the 2007 Plan, he or she must own at least 900 shares of Pinnacle West’s common stock as of December 31 of the same calendar year to receive a grant of 1,600 shares of Pinnacle West common stock. If the non-employee director owns 900 shares of common stock as of June 30, he or she will receive a grant of 1,600 shares of common stock on the first business day of July of the same calendar year. If the non-employee director does not own 900 shares of Pinnacle West’s common stock as of June 30 in the first calendar year in which the non-employee director is eligible to participate in the 2007 Plan, but acquires the necessary shares on or before December 31 of the same year, he or she will receive a grant of 1,600 shares of common stock within a reasonable time after Pinnacle West verifies that the requisite number of shares has been acquired. In each subsequent year, the number of shares of Pinnacle West’s common stock the non-employee director must own to receive a grant of 1,600 shares of common stock will increase by 900 shares, until reaching a maximum of 4,500 shares. In each of the subsequent years, the non-employee director must own the requisite number of shares of Pinnacle West’s common stock as of June 30 of the relevant calendar year. The approved grant to non-employee directors represents an increase from the annual grant of 1,100 shares previously authorized by the Human Resources Committee pursuant to the 2007 Plan and became effective July 1, 2008.

Exhibit 10.3

 	 	A subsidiary of Pinnacle West Capital Corporation	 	 	
 		
 	 	Donald E. Brandt	 	Tel 602/250-5602	 	Mail Station 9042	
 	 	President and Chief Executive Officer	 	Fax 602/250-3303	 	PO Box 53999	
 	 	 	 	 	 	Phoenix, Arizona 85072-3999	
July 18, 2008
Mr. Randall K. Edington
3853 North Sidney Street
Buckeye, AZ 85396-7699
Dear Randy,
In recognition of your significant contributions to Palo Verde’s improvement since you joined APS in early 2007, your critical role in returning Palo Verde to long-term excellence, and your on-going commitment to that process, I am pleased to confirm the following compensation arrangements we recently discussed:

•	 	Effectively immediately, your annual base salary will increase from $660,000 to $800,000, retroactive to June 1, 2008;	
 		
•	 	The Company will enter into a separate Deferred Compensation Agreement with you. Under this new Agreement, we will credit your Deferred Compensation Account with $1,000,000, effective as of July 15, 2008. The Company will increase your account balance by an additional $1,000,000 on June 1 of each year, beginning June 1, 2009, until the account reaches $4,000,000 on June 1, 2011. The account will vest on June 1, 2012, and will be payable before that date upon death, disability, or involuntary termination. You may choose to receive your vested balance in a lump sum or in any other form permitted by the Deferred Compensation Agreement.	
 		
•	 	Effective July 15, 2008, the Company will establish for you a life insurance benefit of $3,000,000 that decreases by $1,000,000 on June 1 of each year, beginning June 1, 2009, until the life insurance benefit terminates on June 1, 2011. The effect of this arrangement, when combined with the account balance referenced in the bullet point immediately above, is that you will always have a net death benefit of $4,000,000 payable to your beneficiaries.	
Randy, we look forward to your continued contributions to Palo Verde and the Company. Please sign below to indicate your acceptance of these arrangements, after which I will have the formal documentation prepared. If you have any questions, please contact me at 602-250-5602.
Sincerely,
/s/ Don Brandt
Signing this letter indicates your acceptance of the terms of this letter.
/s/ Randall K. Edington
Date: July 22, 2008

Exhibit 10.4
RESTRICTED STOCK AGREEMENT
UNDER THE
PINNACLE WEST CAPITAL CORPORATION
2007 LONG-TERM INCENTIVE PLAN
      THIS AWARD AGREEMENT is made and entered into as of                      (the “Date of Grant”), by and between Pinnacle West Capital Corporation (the “Company”), and «Name» (“Employee”).
BACKGROUND

 	A.	 	The Board of Directors of the Company (the “Board of Directors”) has adopted, and the Company’s shareholders have approved, the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan (the “Plan”), pursuant to which awards of Restricted Stock may be granted to employees of the Company and its Subsidiaries and certain other individuals.	
 		
 	B.	 	The Company desires to grant Restricted Stock to Employee under the terms of the Plan.	
 		
 	C.	 	Pursuant to the Plan, the Company and Employee agree as follows:	
AGREEMENT

 	1.	 	Grant of Award . Pursuant to action of the Committee, which was taken on the Date of Grant, the Company grants to Employee «Number» shares of Restricted Stock (the “Restricted Shares”) and Dividend Equivalents based on the dividends declared on the Restricted Shares.	
 		
 	2.	 	Award Subject to Plan . This Restricted Stock Award is granted under and is expressly subject to all of the terms and provisions of the Plan, which terms are incorporated herein by reference, and this Award Agreement.	
 		
 	3.	 	Restrictions on Restricted Shares . Employee agrees to not sell, transfer, pledge, exchange, hypothecate, grant any security interest in, or otherwise dispose of, any Restricted Shares before the date on which the restrictions lapse under Section 4, or enter into any agreement or make any commitment to do so. Any attempted sale, transfer, pledge, exchange, hypothecation or disposition of the Restricted Shares shall be null and void, and the Company shall not recognize or give effect to such transaction on its books and records (including the books and records of the Company’s transfer agent) or recognize the person or persons to whom such sale, transfer, pledge, exchange, hypothecation or disposition has been made as the legal or beneficial owner of the Restricted Shares.	
 		
 	4.	 	Lapse of Restrictions . Subject to the other conditions in this Agreement, the restrictions on the Restricted Shares described in Section 3 will lapse and the Restricted Shares will vest and no longer be subject to forfeiture under this Award Agreement on ___“Vesting Dates” as follows:	
[To be determined]

 

     For avoidance of doubt, no acceleration of vesting of the Restricted Shares will occur on a Change of Control of the Company or upon Employee’s Retirement. For purposes of this Award Agreement, “Retirement” means a termination of employment which constitutes an “Early Retirement” or a “Normal Retirement” under the Pinnacle West Capital Corporation Retirement Plan.

 	5.	 	Acknowledgements and Representation of Employee . By accepting the Restricted Shares, Employee hereby acknowledges the following:	
     (a) Further Limitations on Disposition . Employee understands and acknowledges that Employee may not make any sale, assignment, transfer or other disposition (including transfer by gift or operation of law) of all or any portion of the Restricted Shares except in accordance with this Award Agreement.
     (b) Section  83(b) Election . Employee understands that Section 83 of the Code taxes as ordinary income the difference between the amount paid for the Restricted Shares and the Fair Market Value of the Restricted Shares as of the date any restrictions on the Restricted Shares lapse. In this context, “restriction” means the restrictions set forth in Section 3 hereof. Employee understands that Employee may elect to be taxed at the time the Restricted Shares are granted rather than when and as the restrictions on the Restricted Shares lapse and the Restricted Shares vest by filing an election under Section 83(b) of the Code with the Internal Revenue Service within 45 days from the Date of Grant. Employee understands that failure to make this filing timely shall result in the recognition of ordinary income by Employee on the Fair Market Value of the Restricted Shares at the time such restrictions lapse and the Restricted Shares vest.
      EMPLOYEE ACKNOWLEDGES THAT IT IS EMPLOYEE’S SOLE RESPONSIBILITY, AND NOT THE COMPANY’S, TO TIMELY FILE THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN IF EMPLOYEE REQUESTS THAT THE COMPANY OR ITS REPRESENTATIVES MAKE THIS FILING ON EMPLOYEE’S BEHALF.

 	6.	 	Transfer and Payment .	

 	(a)	 	Time and Form of Payment . As permitted by the Plan, the Company will not deliver to Employee any certificates or other evidence of ownership with respect to the Restricted Shares. Subject to the provisions of this Award Agreement and the Plan, when the restrictions on a Restricted Share lapse on the Vesting Date described in Section 4 above, the Company shall transfer to Employee in exchange for such Restricted Share one unrestricted, fully transferable share of Stock. The transfer shall be made within 60 days of the applicable Vesting Date.	
 		
 	(b)	 	Dividend Equivalents . In satisfaction of the Dividend Equivalent Award made pursuant to Section 1, at the time of the Company’s delivery of fully transferable shares of Stock to Employee pursuant to Section 6(a), the Company also will deliver to Employee a cash payment equal to the amount of dividends, if any, declared on the number of shares of Stock equal to the number of fully transferable shares of Stock delivered to Employee from the Date of Grant to the date of the payment, plus interest on such amount at the rate of ___ percent compounded quarterly, as determined pursuant to the Plan.	

 	7.	 	Termination of Award . In the event of the termination of Employee’s active employment with the Company or any of its Subsidiaries, whether due to voluntary	
 2 

 

 	 	 	or involuntary termination, death, disability or otherwise, Employee’s right to receive and/or vest in any additional Restricted Shares under the Plan, if any, will terminate. Any unvested Restricted Shares and the related Dividend Equivalents will be forfeited effective as of the date that Employee terminates active employment with the Company or any of its Subsidiaries.	
 		
 	8.	 	Section 409A Compliance .	

 	(a)	 	Purpose of this Provision . Section 409A of the Code imposes a number of requirements on “non-qualified deferred compensation” plans and arrangements. Based on regulations issued by the Internal Revenue Service, the Company has concluded that the award of Restricted Shares under this Award Agreement is not subject to Section 409A. In addition, the Dividend Equivalent Award is exempt from the requirements of Section 409A pursuant to the short-term deferral exception.	
 		
 	(b)	 	Short-Term Deferral Exception to Section 409A . The Company intends that the Dividend Equivalents payable pursuant to Section 6(b) will comply with the short-term deferral exception to the requirements of Section 409A of the Code, as described in Treas. Reg. § 1.409A-1(b)(4). In order to meet the requirements of the short-term deferral exception, despite any other provision of this Award Agreement to the contrary, the Dividend Equivalent payments due pursuant to this Award Agreement shall be paid at the time stated in Section 6(b). Payment of Dividend Equivalents under this Award Agreement may be delayed only in accordance with regulations issued pursuant to Section 409A.	
 		
 	(c)	 	Ban on Acceleration or Deferral . Under no circumstances may the time or schedule of any Dividend Equivalent payment provided under Section 6(b) of this Award Agreement be accelerated or subject to a further deferral except as otherwise permitted or required pursuant to regulations and other guidance issued pursuant to Section 409A of the Code.	
 		
 	(d)	 	No Elections . Employee does not have any right to make any election regarding the time or form of any Dividend Equivalent payment due under this Award Agreement.	
 		
 	(e)	 	Compliant Operation and Interpretation . The Plan and this Award Agreement shall be administered in compliance with Section 409A and each provision of the Award Agreement and the Plan shall be interpreted, to the extent possible, to comply with Section 409A or an exception thereto.	

 	9.	 	Tax Withholding . Any and all transfers of Stock and payments of Dividend Equivalents made pursuant to this Award Agreement shall be subject to applicable tax withholding requirements and employment taxes. Employee’s tax withholding obligation with respect to Dividend Equivalents will be satisfied through the Company’s withholding from the Dividend Equivalent payment. Employee must pay, or make arrangements acceptable to the Company for the payment of, any and all required federal, state, and local income and payroll tax withholding attributable to any and all transfers of Stock. Employee may satisfy any such tax withholding obligation attributable to any and all transfers of Stock by paying the amount in cash or by check or by directing the Company to withhold shares of Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation attributable to any and all transfers of Stock. Within ___ days after the Date of Grant, Employee must elect, by providing written notice to the Company, to satisfy any tax withholding obligation attributable to any and all transfers of Stock by paying	
 3 

 

 	 	 	the amount in cash, by check, or by having the Company withhold shares of Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation. In the absence of a timely election by Employee, Employee’s tax withholding obligation with respect to transferred Stock will be satisfied through the Company’s withholding shares of Stock as set forth above.	
 		
 	10.	 	Continued Employment . Nothing in the Plan or this Award Agreement shall be interpreted to interfere with or limit in any way the right of the Company to terminate Employee’s employment or services at any time. In addition, nothing in the Plan or this Award Agreement shall be interpreted to confer upon Employee the right to continue in the employ or service of the Company.	
 		
 	11.	 	Voting Rights . Employee is [not] entitled to voting rights with respect to the Restricted Shares by virtue of this Award.	
 		
 	12.	 	Non-Transferability . Neither this Award nor any rights under this Award Agreement may be assigned, transferred, or in any manner encumbered except by will or the laws of descent and distribution, and any attempted assignment, transfer, mortgage, pledge or encumbrance, except as herein authorized, will be void and of no effect.	
 		
 	13.	 	Definitions: Copy of Plan and Plan Prospectus . To the extent not specifically defined in this Award Agreement, all capitalized terms used in this Award Agreement will have the same meanings ascribed to them in the Plan. Employee will receive a copy of the Plan and the related Plan Prospectus. In the event of any conflict between the terms and conditions of this Award Agreement and the Plan, the provisions of the Plan shall control.	
 		
 	14.	 	Amendment . Except as otherwise provided in the Plan, this Award Agreement may be amended only by a written agreement executed by the Company and Employee.	
 		
 	15.	 	Choice of Law . This Award Agreement will be governed by the laws of the State of Arizona, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Award Agreement to another jurisdiction.	
     An authorized representative of the Company has signed this Award Agreement as of the Date of Grant.
 	 	 	 	 	
 	 	PINNACLE WEST CAPITAL CORPORATION	
 	 	 	 	 	
 	 	By:	 	 	
 	 	 	 	
 	 	Its:	 	 	
 	 	 	 	
 4 

Exhibit 10.5
PERFORMANCE SHARE AGREEMENT
UNDER THE
PINNACLE WEST CAPITAL CORPORATION
2007 LONG-TERM INCENTIVE PLAN
      THIS AWARD AGREEMENT is made and entered into as of                      (the “Date of Grant”), by and between Pinnacle West Capital Corporation (the “Company”), and                      (“Employee”).
BACKGROUND

 	A.	 	The Board of Directors of the Company has adopted, and the Company’s shareholders have approved, the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan (the “Plan”), pursuant to which Performance Share Awards may be granted to employees of the Company and its Subsidiaries and certain other individuals.	
 		
 	B.	 	The Company desires to grant to Employee a Performance Share Award under the terms of the Plan.	
 		
 	C.	 	Pursuant to the Plan, the Company and Employee agree as follows:	
AGREEMENT

 	1.	 	Grant of Award . Pursuant to action of the Committee, which was taken on the Date of Grant, the Company grants to Employee                      (___) Performance Shares and Dividend Equivalents based on the dividends declared on the Performance Shares. The Performance Shares granted under this Section 1 are referred to in this Award Agreement as the “Base Grant.”	
 		
 	2.	 	Award Subject to Plan . This Performance Share Award is granted under and is expressly subject to all of the terms and provisions of the Plan, which terms are incorporated herein by reference, and this Award Agreement.	
 		
 	3.	 	Performance Period . The Performance Period for this Award begins January 1, ___ and ends December 31, ___.	
 		
 	4.	 	Payment .	

 	(a)	 	Performance Shares Payable In Stock . As soon as practicable in the fiscal year immediately following the end of the Performance Period, but in no event later than December 31 of such fiscal year, the Company will determine the Company’s Earnings Per Share Growth Rate (as defined herein) as compared to the Earnings Per Share Growth Rate of the Index set forth on Attachment A (the “Index”) over the Performance Period and will deliver to Employee one (1) share of the Company’s Stock for each then-outstanding Performance Share under this Award Agreement. For avoidance of doubt, no acceleration of Performance Shares or the Performance Period will occur on a Change of Control of the Company.	
 		
 	(b)	 	Retirement . In the case of Employee’s Retirement (as defined herein) during the Performance Period, Employee shall be deemed to have been employed by the Company through the end of the Performance Period and	

 

 	 	 	Employee will receive the Stock and Dividend Equivalents, if any, to which Employee is entitled at the time specified in this Section. For purposes of this Award Agreement, “Retirement” means a termination of employment which constitutes an “Early Retirement” or a “Normal Retirement” under the Pinnacle West Capital Corporation Retirement Plan.	
 		
 	(c)	 	Dividend Equivalents . In satisfaction of the Dividend Equivalent Award made pursuant to Section 1, at the time of the Company’s delivery of Stock to Employee pursuant to Subsection 4(a) above, the Company also will deliver to Employee a cash payment equal to the amount of dividends, if any, declared on the number of shares of Stock equal to the number of shares of Stock delivered to Employee from the Date of Grant to the date of the payment, plus interest on such amount at the rate of ___ percent, compounded quarterly, as determined pursuant to the Plan.	

 	5.	 	Performance Criteria and Adjustments .	
 		
 	 	 	Adjustment of Base Grant . The Base Grant will increase or decrease based upon the Company’s “Earnings Per Share Growth Rate” as compared to the Earnings Per Share Growth Rate of the Index during the Performance Period, as follows:	
 	 	 	
If the Company’s Earnings Per Share	 	 	
Compound Growth Rate Over The Performance	 	The Number of	
Period As Compared to the Index is:	 	Performance Shares will be:	
90 th Percentile or Greater	 	2 X Base Grant	
75 th Percentile	 	1.5 X Base Grant	
50 th Percentile	 	Base Grant	
25 th Percentile	 	0.5 X Base Grant	
Less than 25 th Percentile	 	None	
     If intermediate percentiles are achieved, the number of Performance Shares awarded will be prorated (partial shares will be rounded down to the nearest whole share when applicable) . For example, if the Company’s Earnings Per Share Growth Rate during the Performance Period places the Company’s performance in the 80th percentile, then the number of Performance Shares would be increased to 1.667 multiplied by the Base Grant. In no event will Employee be entitled to receive a number of Performance Shares greater than 2 times the Base Grant, even if the Company’s Earnings Per Share Growth Rate during the Performance Period places the Company’s performance higher than the 90th percentile. Attachment B provides a generic example of the operation of an Award granted under this Award Agreement.

 	6.	 	Earnings Per Share Growth Rate . “Earnings Per Share Growth Rate” for the Performance Period is the compounded annual-growth rate (CAGR) of a company’s earnings per share from continuing operations, on a fully diluted basis, during the Performance Period; provided, however, that for purposes of calculating the Company’s Earnings Per Share Growth Rate, SunCor Development Company’s earnings from discontinued operations will be considered earnings from continuing operations for each fiscal year during the Performance Period. Only those companies which were in the Index at both the beginning and the ending of the Performance Period will be considered. The Earnings Per Share Growth Rate of the companies in the Index will be determined using an independent third party data system. If the Index is discontinued, the Committee shall select the most comparable index then in use for the sector comparison. In addition, if the sector comparison is no longer representative of the Company’s industry or business, the Committee shall replace the Index with the most representative index then in use. Once the CAGR of the Company and all relevant companies in the Index have been	

 

 	 	 	determined, the member companies will be ranked from greatest to least CAGR. Percentiles will be calculated based on a company’s relative ranking. For example, company 1 out of 26 companies is given a percentile of 96.2% (1.0 – 1/26). Percentiles will be carried out to one (1) decimal place. If the Company is not in the Index, then its percentile will be interpolated between the companies listed in the relative ranking. These calculations will be verified by the Company’s internal auditors.	
 		
 	7.	 	Termination of Award . This Award Agreement will terminate and be of no further force or effect on the date that Employee is no longer actively employed by the Company or any of its Subsidiaries, whether due to voluntary or involuntary termination, death, retirement, disability, or otherwise, except as specifically set forth in Section 4. Employee will, however, be entitled to receive any Stock and Dividend Equivalents payable under Section 4 of this Award Agreement if Employee’s employment terminates after the end of the Performance Period but before Employee’s receipt of such Stock and Dividend Equivalents.	
 		
 	8.	 	Section 409A Compliance .	

 	(a)	 	Purpose of this Provision . Section 409A of the Code imposes a number of requirements on “non-qualified deferred compensation” plans and arrangements. Based on regulations issued by the Internal Revenue Service, the Company has concluded that this Performance Share Award is subject to Section 409A. As a result, unless the Plan and this Award Agreement are administered to comply with the new rules, Employee will be required to pay an additional 20% tax (in addition to regular income taxes) on the compensation provided by this Award Agreement. In addition, under Section 409A additional interest will be payable.	
 		
 	(b)	 	Compliance with Section 409A . The Company intends to comply with Section 409A by assuring that all amounts to which Employee becomes entitled hereunder are payable at a specified time or pursuant to a fixed schedule within the meaning of Treas. Reg. § 1.409A-3(a)(4). As a result, any payment or transfer to Employee shall be made at the time specified in Section 4. The provisions of this Subsection 8(b) apply to all amounts due pursuant to this Award Agreement.	
 		
 	(c)	 	Miscellaneous Payment Provisions . If a payment is not made due to a dispute in payments, payments can be delayed in accordance with Treas. Reg. § 1.409A-3(g).	
 		
 	(d)	 	Ban on Acceleration or Deferral . Under no circumstances may the time or schedule of any payment made or benefit provided pursuant to this Award Agreement be accelerated or subject to a further deferral except as otherwise permitted or required pursuant to regulations and other guidance issued pursuant to Section 409A of the Code.	
 		
 	(e)	 	No Elections . Employee does not have any right to make any election regarding the time or form of any payment due under this Award Agreement.	

 

 	(f)	 	Compliant Operation and Interpretation . The Plan and this Award Agreement shall be administered in compliance with Section 409A and each provision of the Award Agreement and the Plan shall be interpreted, to the extent possible, to comply with Section 409A.	

 	9.	 	Tax Withholding . Any and all payments made pursuant to this Award Agreement shall be subject to applicable tax withholding requirements and employment taxes. Employee must pay, or make arrangements acceptable to the Company for the payment of any and all required federal, state, and local income and payroll tax withholding. Employee may satisfy any such tax withholding obligation by paying the amount in cash or by check. In the alternative, Employee may elect to have the Company withhold shares of Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation. Within ___ days after the Date of Grant, Employee must elect, by providing written notice to the Company, to satisfy any tax withholding obligation by paying the amount in cash or by check or by having the Company withhold shares of Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation. In the absence of a timely election by Employee, Employee’s tax withholding obligation will be satisfied through the Company’s withholding shares of Stock as set forth above.	
 		
 	10.	 	Continued Employment . Nothing in the Plan or this Award Agreement shall be interpreted to interfere with or limit in any way the right of the Company to terminate Employee’s employment or services at any time. In addition, nothing in the Plan or this Award Agreement shall be interpreted to confer upon Employee the right to continue in the employ or service of the Company.	
 		
 	11.	 	Voting Rights . Employee is not entitled to voting rights with respect to shares of Stock by virtue of this Award. Upon issuance of Stock in settlement of Employee’s Performance Share Awards, Employee will have voting rights with respect to such shares of Stock.	
 		
 	12.	 	Non-Transferability . Neither this Award nor any rights under this Award Agreement may be assigned, transferred, or in any manner encumbered except by will or the laws of descent and distribution, and any attempted assignment, transfer, mortgage, pledge or encumbrance except as herein authorized, will be void and of no effect.	
 		
 	13.	 	Definitions: Copy of Plan and Plan Prospectus . To the extent not specifically defined in this Award Agreement, all capitalized terms used in this Award Agreement will have the same meanings ascribed to them in the Plan. Employee will receive a copy of the Plan and the related Plan Prospectus. In the event of any conflict between the terms and conditions of this Award Agreement and the Plan, the provisions of the Plan shall control.	
 		
 	14.	 	Amendment . Except as otherwise provided in the Plan, this Award Agreement may be amended only by a written agreement executed by the Company and Employee.	
 		
 	15.	 	Choice of Law . This Award Agreement will be governed by the laws of the State of Arizona, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Award Agreement to another jurisdiction.	

 

     An authorized representative of the Company has signed this Award Agreement as of the Date of Grant.
 	 	 	 	 	
 	 	PINNACLE WEST CAPITAL CORPORATION	
 	 	 	 	 	
 	 	By: 	 	 	
 	 	 	 	
 	 	Its: 	 	 	

 

Attachment A
     The Index will be the S&P 1500 Super Composite Electric Utility Index.
Attachment B
Generic Example
(Performance Share Award)
ASSUMPTIONS:

•	 	Employee is granted 500 Performance Shares, which constitutes Employee’s “Base Grant.”	
 		
•	 	During the Performance Period, the Company’s Earnings Per Share Growth Rate is in the 88.3 percentile compared to the Index.	
CALCULATION OF EMPLOYEE’S STOCK PAYMENT:

•	 	Based on the Company’s achievement of the 88.3 Percentile during the Performance Period, to be determined as soon as practicable after the end of the fiscal year immediately following the end of the Performance Period, Employee will receive 971 shares of Stock, calculated as follows:	

 	o	 	750 shares of Stock as a result of the Company’s Earnings Per Share Growth Rate meeting at least the 75th Percentile (1.5 X Base Grant) plus	
 		
 	o	 	221 shares of Stock as a result of the Company’s Earnings Per Share Growth Rate achieving 13.3/15 of the Percentile increase between the 75th and 90th Percentile (13.3/15 X 250) shares, with the 250 shares representing the Stock opportunity between the 75th and 90th Percentiles). (Note: 13.3/15 X 250 shares = 221.67 shares and must be rounded down to 221 shares.)	

 

Pinnacle West Capital Corporation
PERFORMANCE SHARE AWARD
ELECTION FORM

INFORMATION ABOUT YOU
 	 	 	 	 	 	 	
Last	 	First	 	Middle Initial	 	Employee ID#	
 	
TAX WITHHOLDING ELECTION
 
I hereby elect to satisfy any tax withholding obligation associated with my receipt of Stock pursuant to my Performance Share Agreement in the following form (place an “X” in the “Cash” column or in the “Stock” column):

 	 	 	
Cash	 	Stock	
 	 	 	
(I will write a check
for my taxes that are due)	 	(The Company should withhold shares of my
stock to cover my taxes)	
o	 	o	

 	 	 	

PARTICIPANT NAME (PLEASE PRINT)	 	 	

 	 	 	
PARTICIPANT SIGNATURE	 	DATE	
IMPORTANT NOTE: Please complete and return this Election Form to                      at Mail Station                     

Exhibit 10.6
RESTRICTED STOCK UNIT AGREEMENT
UNDER THE
PINNACLE WEST CAPITAL CORPORATION
2007 LONG-TERM INCENTIVE PLAN
      THIS AWARD AGREEMENT is made and entered into as of                                           (the “Date of Grant”), by and between Pinnacle West Capital Corporation (the “Company”), and                                           (“Employee”).
BACKGROUND

 	A.	 	The Board of Directors of the Company (the “Board of Directors”) has adopted, and the Company’s shareholders have approved, the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan (the “Plan”), pursuant to which Restricted Stock Units may be granted to employees of the Company and its Subsidiaries and certain other individuals.	
 		
 	B.	 	The Company desires to grant to Employee Restricted Stock Units under the terms of the Plan.	
 		
 	C.	 	Pursuant to the Plan, the Company and Employee agree as follows:	
AGREEMENT

 	1.	 	Grant of Award . Pursuant to action of the Committee which was taken on the Date of Grant, the Company grants to Employee                                           (                      ) Restricted Stock Units and Dividend Equivalents based on the dividends declared on the shares of Stock to which such Restricted Stock Units relate.	
 		
 	2.	 	Award Subject to Plan . This Restricted Stock Unit Award is granted under and is expressly subject to all of the terms and provisions of the Plan, which terms are incorporated herein by reference, and this Award Agreement.	
 		
 	3.	 	Vesting of Restricted Stock Units . The Restricted Stock Units granted hereunder will vest and no longer be subject to the restrictions of and forfeiture under this Award Agreement on                      “Vesting Dates” as follows:	
[To be determined]
     In addition, the Restricted Stock Units will fully vest and no longer be subject to the restrictions of and forfeiture under this Award Agreement upon Employee’s Retirement. For purposes of this Award Agreement, “Retirement” means a termination of employment which constitutes an “Early Retirement” or a “Normal Retirement” under the Pinnacle West Capital Corporation Retirement Plan.
     For avoidance of doubt, no acceleration of vesting of the Restricted Stock Units will occur on a Change of Control of the Company.

 	4.	 	Payment .	

 	(a)	 	Time and Form of Payment . Subject to the provisions of this Award Agreement and the Plan, when a Restricted Stock Unit vests on one of the Vesting Dates set forth in clauses (a), (b), (c) or (d) of Section 3 above, the Company shall transfer to Employee in exchange for such Restricted Stock	

 

 	 	 	Unit either one unrestricted, fully transferable share of Stock or a cash payment equal to the Fair Market Value of one share of Stock determined as of the Vesting Date on which such Restricted Stock Unit vests. If a Restricted Stock Unit vests prior to the applicable Vesting Date due to Employee’s Retirement, the transfer or payment will be deferred until the applicable Vesting Date. If no prices are reported for a particular Vesting Date, the Fair Market Value shall be determined as of the next preceding day for which prices were reported. The transfer or payment shall be made within 90 days of the applicable Vesting Date.	

 	(b)	 	Election of Form of Payment . Within ___ days after the Date of Grant, Employee must elect to receive payment for Employee’s vested Restricted Stock Units in cash or in fully transferable shares of Stock by completing and returning to the Company the election form attached to this Agreement. In the absence of a timely election by Employee, Employee will receive payment for the vested Restricted Stock Units in fully transferable shares of Stock.	
 		
 	(c)	 	Dividend Equivalents . In satisfaction of the Dividend Equivalent Award made pursuant to Section 1, at the time of the Company’s delivery of any cash payment or fully transferable shares of Stock to Employee pursuant to Section 4(a), the Company also will deliver to Employee a cash payment equal to the amount of dividends, if any, that Employee would have received if Employee had directly owned the Stock to which the Restricted Stock Units relate from the Date of Grant to the date of the payment, plus interest on such amount at the rate of ___ percent compounded quarterly, as determined pursuant to the Plan.	

 	5.	 	Termination of Award . Except as otherwise provided in Section 3 with respect to Employee’s Retirement, in the event of the termination of Employee’s active employment with the Company or any of its Subsidiaries, whether due to voluntary or involuntary termination, death, disability or otherwise, Employee’s right to receive and/or vest in any additional Restricted Stock Units under the Plan, if any, will terminate. Any unvested Restricted Stock Units and the related Dividend Equivalents will be forfeited effective as of the date that Employee terminates active employment with the Company or any of its Subsidiaries.	
 		
 	6.	 	Section 409A Compliance .	

 	(a)	 	Purpose of this Provision . Section 409A of the Code imposes a number of requirements on “non-qualified deferred compensation” plans and arrangements. Based on regulations issued by the Internal Revenue Service, the Company has concluded that this Award of Restricted Stock Units is subject to Section 409A. As a result, unless the Plan and this Award Agreement are administered to comply with the new rules, Employee will be required to pay an additional 20% tax (in addition to regular income taxes) on the compensation provided by this Award Agreement. In addition, under Section 409A additional interest will be payable.	
 		
 	(b)	 	Compliance with Section 409A . The Company intends to comply with Section 409A by assuring that all amounts to which Employee becomes entitled hereunder are payable at a specified time or pursuant to a fixed schedule within the meaning of Treas. Reg. § 1-409A-3(a)(4). As a result, no payment or transfer shall be made to Employee prior to the applicable Vesting Date. The provisions of this Section 6(b) apply to all amounts due pursuant to this Award Agreement.	
 2 

 

 	(c)	 	Miscellaneous Payment Provisions . If the Company fails to make a payment (including a transfer of Stock), either intentionally or unintentionally, within the period required by Section 4, but the payment is made within the same calendar year, it will be treated as made within the period required by Section 4 pursuant to Treas. Reg. § 1.409A-3(d). In addition, if a payment is not made due to a dispute in payments, payments can be delayed in accordance with Treas. Reg. § 1.409A-3(g).	
 		
 	(d)	 	Ban on Acceleration or Deferral . Under no circumstances may the time or schedule of any payment made or benefit provided pursuant to this Award Agreement be accelerated or subject to a further deferral except as otherwise permitted or required pursuant to regulations and other guidance issued pursuant to Section 409A of the Code.	
 		
 	(e)	 	No Elections . Employee does not have any right to make any election regarding the time or form of any payment due under this Award Agreement other than the election described in Section 4(b).	
 		
 	(f)	 	Compliant Operation and Interpretation . The Plan and this Award Agreement shall be administered in compliance with Section 409A and each provision of the Award Agreement and the Plan shall be interpreted, to the extent possible, to comply with Section 409A.	

 	7.	 	Tax Withholding . Any and all payments made pursuant to this Award Agreement shall be subject to applicable tax withholding requirements and employment taxes. Employee must pay, or make arrangements acceptable to the Company for the payment of any and all required federal, state, and local income and payroll tax withholding. Employee may satisfy any such tax withholding obligation by paying the amount in cash or by check. In the alternative, Employee may elect to have the Company withhold shares of Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation. Within                      days after the Date of Grant, Employee must elect, on the election form described in Section 4(b), to satisfy any tax withholding obligation by paying the amount in cash or by check or by having the Company withhold shares of Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation. In the absence of a timely election by Employee, Employee’s tax withholding obligation will be satisfied through the Company’s withholding shares of Stock as set forth above.	
 		
 	8.	 	Continued Employment . Nothing in the Plan or this Award Agreement shall be interpreted to interfere with or limit in any way the right of the Company to terminate Employee’s employment or services at any time. In addition, nothing in the Plan or this Award Agreement shall be interpreted to confer upon Employee the right to continue in the employ or service of the Company.	
 		
 	9.	 	Voting Rights . Employee is not entitled to voting rights with respect to shares of Stock by virtue of this Award. If the Committee, in its discretion, issues Stock in settlement of Employee’s Restricted Stock Units, Employee will have voting rights with respect to such shares of Stock.	
 		
 	10.	 	Non-Transferability . Neither this Award nor any rights under this Award Agreement may be assigned, transferred, or in any manner encumbered except by will or the laws of descent and distribution, and any attempted assignment, transfer, mortgage, pledge or encumbrance except as herein authorized, will be void and of no effect.	
 3 

 

 	11.	 	Definitions: Copy of Plan and Plan Prospectus . To the extent not specifically defined in this Award Agreement, all capitalized terms used in this Award Agreement will have the same meanings ascribed to them in the Plan. Employee will receive a copy of the Plan and the related Plan Prospectus. In the event of any conflict between the terms and conditions of this Award Agreement and the Plan, the provisions of the Plan shall control.	
 		
 	12.	 	Amendment . Except as otherwise provided in the Plan, this Award Agreement may be amended only by a written agreement executed by the Company and Employee.	
 		
 	13.	 	Choice of Law . This Award Agreement will be governed by the laws of the State of Arizona, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Award Agreement to another jurisdiction.	
          An authorized representative of the Company has signed this Award Agreement as of the Date of Grant.
 	 	 	 	 	 	 	
 	 	PINNACLE WEST CAPITAL CORPORATION	 	 	
 	 	 	 	 	 	 	
 	 	By:	 	 	 	 	
 	 	 	 	 	 	 	
 	 	Its:	 	 	 	 	
 	 	 	 	 	 	 	
 4 

 

Pinnacle West Capital Corporation
RESTRICTED STOCK UNIT AWARD
ELECTION FORM

 	 	 	 	 	 	 	 	 	 	
INFORMATION ABOUT YOU	
  Last	 	 	First	 	 	Middle Initial	 	 	Employee ID#	

1. PAYMENT ELECTION	
 	 	 	 	 	 	 	 	 	 	
In accordance with the terms of the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan and pursuant to Section 4(b) of the Award Agreement, I hereby elect to receive payment for the Restricted Stock Units that vest on the dates set forth below in the following form (place an “X” in the “Cash” column or in the “Stock” column for each of the years set forth below):	

       Vesting Date	 	   Cash	 	Stock	
 	
                                         	 	¨	 	¨	
 	 	 	 	 	
                                         	 	¨	 	¨	
 	 	 	 	 	
                                         	 	¨	 	¨	
 	 	 	 	 	
                                         	 	¨	 	¨	
Note: If you elected to receive payment in the form of Stock for any vested Restricted Stock Units, complete Section 2.	
 	
2. TAX WITHHOLDING ELECTION	
 	
If I elected above to receive payment in the form of Stock for any vested Restricted Stock Units, I hereby elect to satisfy any tax withholding obligation associated with my receipt of Stock in exchange for my Restricted Stock Units in the following form (place an “X” in the “Cash” column or in the “Stock” column):	

Cash	 	Stock	
 	 	 	
(I will write a check on the vesting date	 	(The Company should withhold shares of my	
for my taxes that are due)	 	stock to cover my taxes)	
 	 	 	
¨	 	¨	

                                                                                                              	 	 	
PARTICIPANT NAME (PLEASE PRINT)	 	 	

PARTICIPANT SIGNATURE	 	DATE	
IMPORTANT NOTE: Please complete and return this Election Form to                      at Mail Station                     

EXHIBIT 10.7
Description of 2008 Palo Verde Specific Compensation Opportunity for
Randall K. Edington
Consistent with the letter agreement between the Company and Mr. Edington, dated December 20, 2006, the Company adopted the 2008 Palo Verde Specific Compensation Opportunity. Mr. Edington has the opportunity to receive up to $125,000 upon the achievement of performance measures tied to Palo Verde maintenance and technical programs, performance improvements as documented by INPO, NRC findings, and operational performance.

Exhibit 12.1
PINNACLE WEST CAPITAL CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months	 	 	 	 	
 	 	Ended	 	 	 	 	
 	 	June 30,	 	 	Twelve Months Ended December 31,	 	
 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	 	2004	 	 	2003	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	109,765	 	 	$	301,132	 	 	$	317,143	 	 	$	223,163	 	 	$	246,590	 	 	$	225,384	 	
Income taxes	 	 	16,519	 	 	 	152,447	 	 	 	156,418	 	 	 	126,892	 	 	 	136,142	 	 	 	102,202	 	
Fixed charges	 	 	119,341	 	 	 	235,705	 	 	 	225,119	 	 	 	214,430	 	 	 	214,803	 	 	 	225,041	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Earnings	 	$	245,625	 	 	$	689,284	 	 	$	698,680	 	 	$	564,485	 	 	$	597,535	 	 	$	552,627	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	$	106,349	 	 	$	208,521	 	 	$	196,826	 	 	$	185,087	 	 	$	183,527	 	 	$	193,973	 	
Estimated interest portion of annual rents	 	 	12,992	 	 	 	27,184	 	 	 	28,293	 	 	 	29,343	 	 	 	31,276	 	 	 	31,068	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Fixed Charges	 	$	119,341	 	 	$	235,705	 	 	$	225,119	 	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	

Ratio of Earnings to Fixed Charges (rounded down)	 	 	2.05	 	 	 	2.92	 	 	 	3.10	 	 	 	2.63	 	 	 	2.78	 	 	 	2.45	 	

Exhibit 12.2
ARIZONA PUBLIC SERVICE COMPANY
COMPUTATION OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months	 	 	 	 	
 	 	Ended	 	 	 	 	
 	 	June 30,	 	 	Twelve Months Ended December 31,	 	
 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	 	2004	 	 	2003	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	119,018	 	 	$	283,940	 	 	$	269,730	 	 	$	170,479	 	 	$	199,627	 	 	$	180,937	 	
Income taxes	 	 	23,756	 	 	 	151,157	 	 	 	138,927	 	 	 	98,010	 	 	 	120,030	 	 	 	86,854	 	
Fixed charges	 	 	104,338	 	 	 	202,044	 	 	 	191,174	 	 	 	178,437	 	 	 	181,372	 	 	 	181,793	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Earnings	 	$	247,112	 	 	$	637,141	 	 	$	599,831	 	 	$	446,926	 	 	$	501,029	 	 	$	449,584	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	$	89,261	 	 	$	170,594	 	 	$	158,769	 	 	$	145,502	 	 	$	146,983	 	 	$	147,610	 	
Amortization of debt discount	 	 	2,320	 	 	 	4,639	 	 	 	4,363	 	 	 	4,085	 	 	 	4,854	 	 	 	3,337	 	
Estimated interest portion of annual rents	 	 	12,757	 	 	 	26,811	 	 	 	28,042	 	 	 	28,850	 	 	 	29,535	 	 	 	30,846	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Fixed Charges	 	$	104,338	 	 	$	202,044	 	 	$	191,174	 	 	$	178,437	 	 	$	181,372	 	 	$	181,793	 	

Ratio of Earnings to Fixed Charges (rounded down)	 	 	2.36	 	 	 	3.15	 	 	 	3.13	 	 	 	2.50	 	 	 	2.76	 	 	 	2.47	 	

Exhibit 12.3
PINNACLE WEST CAPITAL CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Six Months	 	 	 	 	
 	 	Ended	 	 	 	 	
 	 	June 30,	 	 	Twelve Months Ended December 31,	 	
 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	 	2004	 	 	2003	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	109,765	 	 	$	301,132	 	 	$	317,143	 	 	$	223,163	 	 	$	246,590	 	 	$	225,384	 	
Income taxes	 	 	16,519	 	 	 	152,447	 	 	 	156,418	 	 	 	126,892	 	 	 	136,142	 	 	 	102,202	 	
Fixed charges	 	 	119,341	 	 	 	235,705	 	 	 	225,119	 	 	 	214,430	 	 	 	214,803	 	 	 	225,041	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Earnings	 	$	245,625	 	 	$	689,284	 	 	$	698,680	 	 	$	564,485	 	 	$	597,535	 	 	$	552,627	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	$	106,349	 	 	$	208,521	 	 	$	196,826	 	 	$	185,087	 	 	$	183,527	 	 	$	193,973	 	
Estimated interest portion of annual rents	 	 	12,992	 	 	 	27,184	 	 	 	28,293	 	 	 	29,343	 	 	 	31,276	 	 	 	31,068	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Fixed Charges	 	$	119,341	 	 	$	235,705	 	 	$	225,119	 	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	

Preferred Stock Dividend Requirements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	$	126,284	 	 	$	453,579	 	 	$	473,561	 	 	$	350,055	 	 	$	382,732	 	 	$	327,586	 	
Net income (loss) from continuing operations	 	 	109,765	 	 	 	301,132	 	 	 	317,143	 	 	 	223,163	 	 	 	246,590	 	 	 	225,384	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of income (loss) before income taxes to net income	 	 	1.150	 	 	 	1.506	 	 	 	1.493	 	 	 	1.569	 	 	 	1.552	 	 	 	1.453	 	
Preferred stock dividends	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred Stock Dividend Requirements — Ratio (above) Times Preferred Stock Dividends	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	

Fixed Charges and Preferred Stock Dividend Requirements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed charges	 	$	119,341	 	 	$	235,705	 	 	$	225,119	 	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	
Preferred stock dividend requirements	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Fixed Charges and Preferred Stock Dividend Requirements	 	$	119,341	 	 	$	235,705	 	 	$	225,119	 	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	

Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (rounded down)	 	 	2.05	 	 	 	2.92	 	 	 	3.10	 	 	 	2.63	 	 	 	2.78	 	 	 	2.45	 	

Exhibit 31.1
CERTIFICATION
I, William J. Post, certify that:

1.	 	I have reviewed this Quarterly Report on Form 10-Q of Pinnacle West Capital Corporation;	

2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.	 	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

 	a)	 	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 		
 	b)	 	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 		
 	c)	 	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 		
 	d)	 	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

 

5.	 	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

 	a)	 	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 		
 	b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: August 7, 2008.

 	/s/ William J. Post  	 	
 	William J. Post 	 	
 	Chairman and Chief Executive Officer 	 	
 	
 2 

Exhibit 31.2
CERTIFICATION
I, Donald E. Brandt, certify that:

1.	 	I have reviewed this Quarterly Report on Form 10-Q of Pinnacle West Capital Corporation;	

2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.	 	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

 	a)	 	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 		
 	b)	 	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 		
 	c)	 	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 		
 	d)	 	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

 

5.	 	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

 	a)	 	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 		
 	b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: August 7, 2008.

 	/s/ Donald E. Brandt  	 	
 	Donald E. Brandt 	 	
 	President, Chief Operating Officer and
Principal Financial Officer 	 	

Exhibit 31.3
CERTIFICATION
I, Donald E. Brandt, certify that:

1.	 	I have reviewed this Quarterly Report on Form 10-Q of Arizona Public Service Company;	

2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.	 	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

 	a)	 	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;	
 		
 	b)	 	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 		
 	c)	 	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 		
 	d)	 	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

 

5.	 	I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

 	a)	 	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 		
 	b)	 	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: August 7, 2008.

 	/s/ Donald E. Brandt  	 	
 	Donald E. Brandt 	 	
 	President, Chief Executive Officer and
Principal Financial Officer 	 	

Exhibit 32.1
CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     I, William J. Post, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Pinnacle West Capital Corporation for the fiscal quarter ended June 30, 2008, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.
Date: August 7, 2008.

 	/s/ William J. Post  	 	
 	William J. Post 	 	
 	Chairman and Chief Executive Officer 	 	
 	
     I, Donald E. Brandt, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Pinnacle West Capital Corporation for the fiscal quarter ended June 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.
Date: August 7, 2008.

 	/s/ Donald E. Brandt  	 	
 	Donald E. Brandt 	 	
 	President, Chief Operating Officer and
Principal Financial Officer 	 	

Exhibit 32.2
CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     I, Donald E. Brandt, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Arizona Public Service Company for the fiscal quarter ended June 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Arizona Public Service Company.
Date: August 7, 2008.

 	/s/ Donald E. Brandt  	 	
 	Donald E. Brandt 	 	
 	President, Chief Executive Officer and
Principal Financial Officer