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 March 31, 2008
OR
 	 	 	
o	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the transition period from                      to                     
 	 	 	 	 	
 	 	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.
PINNACLE WEST CAPITAL CORPORATION
 	 	 	 	 	 	 	
Large accelerated filer þ	 	Accelerated filer o	 	Non-accelerated filer o	 	Smaller reporting company o	
 	 	 	 	(Do not check if a smaller reporting company)	 	 	
ARIZONA PUBLIC SERVICE COMPANY
 	 	 	 	 	 	 	
Large accelerated filer o	 	Accelerated filer o	 	Non-accelerated filer þ	 	Smaller reporting company o	
 	 	 	 	(Do not check if a smaller reporting company)	 	 	
     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 May 5, 2008: 100,633,751	
ARIZONA PUBLIC SERVICE COMPANY	 	Number of shares of common stock, $2.50 par value, outstanding as of May 5, 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	 	 	31	 	
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	40	 	
Item 3. Quantitative and Qualitative Disclosures About Market Risk	 	 	57	 	
Item 4. Controls and Procedures	 	 	57	 	
 	 	 	 	 	
Part II	 	 	59	 	
Item 1. Legal Proceedings	 	 	59	 	
Item 1A. Risk Factors	 	 	59	 	
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	 	 	59	 	
Item 5. Other Information	 	 	59	 	
Item 6. Exhibits	 	 	63	 	
Signatures	 	 	65	 	
  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
FIP — Federal Implementation Plan
Fitch — Fitch, Inc.
Four Corners — Four Corners Power Plant
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.
MWh — megawatt-hour, one million watts per hour
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
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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
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
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Table of Contents
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	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
OPERATING REVENUES	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	622,801	 	 	$	536,051	 	
Real estate segment	 	 	47,742	 	 	 	77,132	 	
Marketing and trading	 	 	57,458	 	 	 	72,471	 	
Other revenues	 	 	8,737	 	 	 	9,363	 	
 	 	 	 	 	 	 	
Total	 	 	736,738	 	 	 	695,017	 	
 	 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	 	 	 	
Regulated electricity segment fuel and purchased power	 	 	269,378	 	 	 	203,353	 	
Real estate segment operations	 	 	48,219	 	 	 	61,336	 	
Marketing and trading fuel and purchased power	 	 	51,522	 	 	 	57,944	 	
Operations and maintenance	 	 	194,124	 	 	 	171,578	 	
Depreciation and amortization	 	 	95,607	 	 	 	89,378	 	
Taxes other than income taxes	 	 	33,152	 	 	 	34,719	 	
Other expenses	 	 	5,938	 	 	 	8,488	 	
 	 	 	 	 	 	 	
Total	 	 	697,940	 	 	 	626,796	 	
 	 	 	 	 	 	 	
OPERATING INCOME	 	 	38,798	 	 	 	68,221	 	
 	 	 	 	 	 	 	
OTHER	 	 	 	 	 	 	 	 	
Allowance for equity funds used during construction	 	 	6,124	 	 	 	4,444	 	
Other income (Note 14)	 	 	3,848	 	 	 	4,512	 	
Other expense (Note 14)	 	 	(4,908	)	 	 	(6,353	)	
 	 	 	 	 	 	 	
Total	 	 	5,064	 	 	 	2,603	 	
 	 	 	 	 	 	 	
INTEREST EXPENSE	 	 	 	 	 	 	 	 	
Interest charges	 	 	54,766	 	 	 	50,126	 	
Capitalized interest	 	 	(5,679	)	 	 	(4,807	)	
 	 	 	 	 	 	 	
Total	 	 	49,087	 	 	 	45,319	 	
 	 	 	 	 	 	 	
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	 	 	(5,225	)	 	 	25,505	 	
INCOME TAXES	 	 	(557	)	 	 	9,041	 	
 	 	 	 	 	 	 	
INCOME (LOSS) FROM CONTINUING OPERATIONS	 	 	(4,668	)	 	 	16,464	 	
INCOME FROM DISCONTINUED OPERATIONS	 	 	 	 	 	 	 	 	
Net of income tax expense of $120 and $46 (Note 17)	 	 	195	 	 	 	66	 	
 	 	 	 	 	 	 	
NET INCOME (LOSS)	 	$	(4,473	)	 	$	16,530	 	
 	 	 	 	 	 	 	
WEIGHTED-AVERAGE COMMON SHARES	 	 	 	 	 	 	 	 	
OUTSTANDING — BASIC	 	 	100,521	 	 	 	100,045	 	
WEIGHTED-AVERAGE COMMON SHARES	 	 	 	 	 	 	 	 	
OUTSTANDING — DILUTED	 	 	100,521	 	 	 	100,622	 	
 	 	 	 	 	 	 	 	 	
EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations — basic	 	$	(0.05	)	 	$	0.16	 	
Net income (loss) — basic	 	$	(0.04	)	 	$	0.17	 	
Income (loss) from continuing operations — diluted	 	$	(0.05	)	 	$	0.16	 	
Net income (loss) — diluted	 	$	(0.04	)	 	$	0.16	 	
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 BALANCE SHEETS
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	 	December 31,	 	
 	 	2008	 	 	2007	 	
ASSETS	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
CURRENT ASSETS	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	17,533	 	 	$	56,321	 	
Customer and other receivables	 	 	392,784	 	 	 	456,007	 	
Allowance for doubtful accounts	 	 	(4,219	)	 	 	(4,782	)	
Materials and supplies (at average cost)	 	 	164,003	 	 	 	149,759	 	
Fossil fuel (at average cost)	 	 	24,966	 	 	 	27,792	 	
Deferred income taxes	 	 	—	 	 	 	31,510	 	
Assets from risk management and trading activities (Note 10)	 	 	133,000	 	 	 	57,605	 	
Home inventory	 	 	94,693	 	 	 	98,729	 	
Assets held for sale (Note 17)	 	 	51,090	 	 	 	7,139	 	
Other current assets	 	 	31,678	 	 	 	26,849	 	
 	 	 	 	 	 	 	
Total current assets	 	 	905,528	 	 	 	906,929	 	

INVESTMENTS AND OTHER ASSETS	 	 	 	 	 	 	 	 	
Real estate investments — net	 	 	480,604	 	 	 	532,600	 	
Assets from long-term risk management and trading activities (Note 10)	 	 	108,702	 	 	 	48,928	 	
Nuclear decommissioning trust (Note 18)	 	 	371,500	 	 	 	379,347	 	
Other assets	 	 	113,891	 	 	 	117,941	 	
 	 	 	 	 	 	 	
Total investments and other assets	 	 	1,074,697	 	 	 	1,078,816	 	

PROPERTY, PLANT AND EQUIPMENT	 	 	 	 	 	 	 	 	
Plant in service and held for future use	 	 	11,764,798	 	 	 	11,640,739	 	
Less accumulated depreciation and amortization	 	 	4,016,182	 	 	 	4,004,944	 	
 	 	 	 	 	 	 	
Net	 	 	7,748,616	 	 	 	7,635,795	 	
Construction work in progress	 	 	597,132	 	 	 	625,577	 	
Intangible assets, net of accumulated amortization	 	 	103,067	 	 	 	105,746	 	
Nuclear fuel, net of accumulated amortization	 	 	94,311	 	 	 	69,271	 	
 	 	 	 	 	 	 	
Total property, plant and equipment	 	 	8,543,126	 	 	 	8,436,389	 	

DEFERRED DEBITS	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power regulatory asset	 	 	50,497	 	 	 	110,928	 	
Other regulatory assets	 	 	502,803	 	 	 	514,353	 	
Other deferred debits	 	 	120,926	 	 	 	114,794	 	
 	 	 	 	 	 	 	
Total deferred debits	 	 	674,226	 	 	 	740,075	 	

TOTAL ASSETS	 	$	11,197,577	 	 	$	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)
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	 	December 31,	 	
 	 	2008	 	 	2007	 	
LIABILITIES AND COMMON STOCK EQUITY	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
CURRENT LIABILITIES	 	 	 	 	 	 	 	 	
Accounts payable	 	$	218,596	 	 	$	323,346	 	
Accrued taxes (Note 8)	 	 	325,771	 	 	 	269,628	 	
Accrued interest	 	 	41,746	 	 	 	39,836	 	
Short-term borrowings	 	 	342,626	 	 	 	340,661	 	
Current maturities of long-term debt (Note 4)	 	 	192,893	 	 	 	163,773	 	
Customer deposits	 	 	78,560	 	 	 	80,010	 	
Deferred income taxes	 	 	33,206	 	 	 	—	 	
Liabilities from risk management and trading activities (Note 10)	 	 	22,916	 	 	 	24,510	 	
Other current liabilities	 	 	85,257	 	 	 	102,685	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	1,341,571	 	 	 	1,344,449	 	

LONG-TERM DEBT LESS CURRENT MATURITIES (NOTE 4)	 	 	3,114,579	 	 	 	3,127,125	 	

DEFERRED CREDITS AND OTHER	 	 	 	 	 	 	 	 	
Deferred income taxes	 	 	1,178,679	 	 	 	1,243,743	 	
Regulatory liabilities	 	 	728,308	 	 	 	642,564	 	
Liability for asset retirements	 	 	263,653	 	 	 	281,903	 	
Liabilities for pension and other postretirement benefits (Note 6)	 	 	514,545	 	 	 	504,603	 	
Liabilities from long-term risk management and trading activities (Note 10)	 	 	11,121	 	 	 	4,701	 	
Unamortized gain — sale of utility plant	 	 	35,462	 	 	 	36,606	 	
Other	 	 	465,458	 	 	 	444,904	 	
 	 	 	 	 	 	 	
Total deferred credits and other	 	 	3,197,226	 	 	 	3,159,024	 	

COMMITMENTS AND CONTINGENCIES (SEE NOTES)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
COMMON STOCK EQUITY	 	 	 	 	 	 	 	 	
Common stock, no par value	 	 	2,134,904	 	 	 	2,135,787	 	
Treasury stock	 	 	(3,398	)	 	 	(2,054	)	
 	 	 	 	 	 	 	
Total common stock	 	 	2,131,506	 	 	 	2,133,733	 	
 	 	 	 	 	 	 	
Accumulated other comprehensive income (loss) (Note 11):	 	 	 	 	 	 	 	 	
Pension and other postretirement benefits	 	 	(38,667	)	 	 	(39,336	)	
Derivative instruments	 	 	95,107	 	 	 	23,473	 	
 	 	 	 	 	 	 	
Total accumulated other comprehensive income (loss)	 	 	56,440	 	 	 	(15,863	)	
 	 	 	 	 	 	 	
Retained earnings	 	 	1,356,255	 	 	 	1,413,741	 	
 	 	 	 	 	 	 	
Total common stock equity	 	 	3,544,201	 	 	 	3,531,611	 	

TOTAL LIABILITIES AND COMMON STOCK EQUITY	 	$	11,197,577	 	 	$	11,162,209	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Condensed Consolidated Financial Statements.
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Table of Contents

PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	 	 	 	
Net Income (Loss)	 	$	(4,473	)	 	$	16,530	 	
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
Depreciation and amortization including nuclear fuel	 	 	104,418	 	 	 	98,476	 	
Deferred fuel and purchased power	 	 	9,722	 	 	 	(26,293	)	
Deferred fuel and purchased power amortization	 	 	50,709	 	 	 	68,766	 	
Allowance for equity funds used during construction	 	 	(6,124	)	 	 	(4,444	)	
Deferred income taxes	 	 	(44,781	)	 	 	(12,752	)	
Change in mark-to-market valuations	 	 	(14,709	)	 	 	(5,494	)	
Changes in current assets and liabilities:	 	 	 	 	 	 	 	 	
Customer and other receivables	 	 	63,285	 	 	 	149,097	 	
Materials, supplies and fossil fuel	 	 	(11,418	)	 	 	(14,438	)	
Other current assets	 	 	(511	)	 	 	4,525	 	
Accounts payable	 	 	(84,556	)	 	 	(124,785	)	
Other current liabilities	 	 	30,057	 	 	 	21,242	 	
Proceeds from the sale of real estate assets	 	 	23,678	 	 	 	16,824	 	
Real estate investments	 	 	(10,967	)	 	 	(24,374	)	
Change in risk management and trading — assets	 	 	93,449	 	 	 	19,715	 	
Change in risk management and trading — liabilities	 	 	6,647	 	 	 	34,191	 	
Change in unrecognized tax benefits	 	 	13,223	 	 	 	—	 	
Change in other long-term assets	 	 	16,145	 	 	 	(11,900	)	
Change in other long-term liabilities	 	 	11,738	 	 	 	9,695	 	
 	 	 	 	 	 	 	
Net cash flow provided by operating activities	 	 	245,532	 	 	 	214,581	 	

CASH FLOWS FROM INVESTING ACTIVITIES	 	 	 	 	 	 	 	 	
Capital expenditures	 	 	(248,264	)	 	 	(210,174	)	
Contributions in aid of construction	 	 	10,040	 	 	 	4,091	 	
Capitalized interest	 	 	(5,679	)	 	 	(4,807	)	
Proceeds from sale of investment securities	 	 	—	 	 	 	69,225	 	
Purchases of investment securities	 	 	—	 	 	 	(36,525	)	
Proceeds from nuclear decommissioning trust sales	 	 	67,177	 	 	 	63,490	 	
Investment in nuclear decommissioning trust	 	 	(72,362	)	 	 	(68,675	)	
Other	 	 	970	 	 	 	(626	)	
 	 	 	 	 	 	 	
Net cash flow used for investing activities	 	 	(248,118	)	 	 	(184,001	)	

CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	 	 	 	
Issuance of long-term debt	 	 	43,690	 	 	 	53,257	 	
Repayment of long-term debt	 	 	(29,295	)	 	 	(39,305	)	
Short-term borrowings and payments — net	 	 	1,965	 	 	 	35,300	 	
Dividends paid on common stock	 	 	(52,759	)	 	 	(52,495	)	
Common stock equity issuance	 	 	2,815	 	 	 	7,613	 	
Other	 	 	(2,618	)	 	 	(907	)	
 	 	 	 	 	 	 	
Net cash flow (used for) provided by financing activities	 	 	(36,202	)	 	 	3,463	 	

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	 	 	(38,788	)	 	 	34,043	 	
 	 	 	 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	 	 	56,321	 	 	 	87,210	 	

CASH AND CASH EQUIVALENTS AT END OF PERIOD	 	$	17,533	 	 	$	121,253	 	

Supplemental disclosure of cash flow information	 	 	 	 	 	 	 	 	
Cash paid during the period for:	 	 	 	 	 	 	 	 	
Income taxes, net of refunds	 	$	9,860	 	 	$	38,980	 	
Interest, net of amounts capitalized	 	$	45,949	 	 	$	50,703	 	
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. We suggest that these condensed consolidated financial statements and notes be read along with the consolidated financial statements and notes to consolidated financial statements included in our 2007 Form 10-K, except to the extent 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) reclassifications as “contributions in aid of construction” of amounts previously reported as part of “capital expenditures” on the Condensed Consolidated Statements of Cash Flows.
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 March 31, 2008 (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Consolidated	 	 	 	 	
     Year	 	Pinnacle West	 	 	APS	 	
2008	 	$	192	 	 	$	—	 	
2009	 	 	58	 	 	 	1	 	
2010	 	 	226	 	 	 	224	 	
2011	 	 	578	 	 	 	401	 	
2012	 	 	376	 	 	 	376	 	
Thereafter	 	 	1,886	 	 	 	1,884	 	
 	 	 	 	 	 	 	
Total	 	$	3,316	 	 	$	2,886	 	
 	 	 	 	 	 	 	
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     Recent sub-prime mortgage issues have adversely affected the overall financial markets. 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. 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. 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 continue to monitor this market and are evaluating our options to eliminate our exposure to the auction rate 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 March 31, 2008, APS’ common equity ratio, as defined, was 54%, its total common equity was approximately $3.4 billion, and total capitalization was approximately $6.2 billion. APS would be prohibited from paying dividends if its common equity falls below approximately $2.5 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 March 31, 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 $217 million.
     As a result of the restrictions in the preceding two paragraphs, as of March 31, 2008, the restricted net assets of our subsidiaries exceeded 25% of our consolidated net assets (at March 31, 2008, our consolidated net assets were approximately $3.5 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 March 24, 2008, APS filed a request with the ACC for a net rate increase of $266 million for retail customers effective no later than July 1, 2009 (the “March Rate Request”) based on a test year ended September 30, 2007, adjusted as described below. The ACC staff requested that APS update financial schedules, testimony and other data contained in the March Rate Request to reflect a test year ended December 31, 2007. Although APS concluded that the March Rate Request complied with applicable ACC test year requirements, to prevent further delays in processing the rate request, APS agreed to file the updated information with the ACC on or before June 3, 2008. The ACC staff has agreed to complete its review of the updated information no later than 30 days after APS makes its revised submission. Thereafter, we expect the ACC to issue a procedural schedule detailing the timeline for addressing the request.
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     The key financial provisions of the March Rate Request included:

 	•	 	an average rate increase of 8.1% for existing customers plus the establishment of a new growth-related impact fee charged to new connections;	
 		
 	•	 	an increase of $253 million in non-fuel base rates and a net increase of $13 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 $5.3 billion, which approximates the ACC-jurisdictional portion of the book value of utility assets, net of accumulated depreciation and other credits, as of September 30, 2007, subject to certain adjustments, such as the inclusion of Units 5 and 6 of the Yucca Power Plant (near Yuma in southwestern Arizona), the steam generator replacements 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	 	 	45.9	%	 	 	5.77	%	
Common stock equity	 	 	54.1	%	 	 	11.50	%	
Weighted-average cost of capital	 	 	 	 	 	 	8.87	%	

 	•	 	a Base Fuel Rate of $0.0366 per kWh based on estimated 2009 prices (an increase from the current Base Fuel Rate of $0.0325 per kWh, including the reclassification of $106 million of fuel and purchased power revenues from the PSA to base rates);	
 		
 	•	 	an $87 million attrition adjustment to address erosion in APS’ earnings and return on equity between the end of the test year and 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.	
     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.
      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 provides that the PSA adjustor that took effect on February 1, 2007 ($0.004 per kWh), and that was scheduled to expire on January 31, 2008, will remain in effect as long as necessary to allow APS to collect $46 million of
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2007 fuel and purchased power costs deferred as a result of the mid-2007 implementation of the new Base Fuel Rate. We anticipate that this adjustor will remain in effect through mid-2008.
      PSA Balance
     The following table shows the changes in the deferred fuel and purchased power regulatory asset for the three months ended March 31, 2008 and 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
Beginning balance	 	$	111	 	 	$	160	 	
Deferred fuel and purchased power costs-current period	 	 	(11	)	 	 	25	 	
Interest on deferred fuel and purchased power	 	 	1	 	 	 	2	 	
Amounts recovered through revenues	 	 	(51	)	 	 	(69	)	
 	 	 	 	 	 	 	
Ending balance	 	$	50	 	 	$	118	 	
 	 	 	 	 	 	 	
     The PSA rate for the PSA Year (February 1 through January 1) 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 Requests for Transmission and Ancillary Services
     On July 10, 2007, APS submitted a revised Open Access Transmission Tariff filing with the FERC to move from a fixed rate to a formula rate in order to more accurately reflect the costs that APS incurs in providing transmission and ancillary services. The requested formula rate would have resulted in 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 requested increase represents charges for transmission services to serve APS’ retail customers (“Retail Transmission Charges”).
     On September 21, 2007, the FERC issued an order on these proposed revisions to APS’ transmission rates in which it accepted APS’ proposed formula rates and ordered settlement judge procedures, which are underway. The proposed rates became effective March 1, 2008, subject to refund based upon the ultimate outcome of proceedings at the FERC on this matter.
     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, to cover the Retail Transmission Charges authorized by the FERC. This retail rate increase implements 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.
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     On June 1, 2008, our FERC transmission rates will automatically adjust based on the formula mechanism described above. In addition, APS will file a new request with the ACC to implement the TCA allowing APS to reflect the resulting increased Retail Transmission Charges in its retail rates.
      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 during 2008 in the event Pinnacle West deems it appropriate to do so. Under Arizona law and implementing regulatory decisions, Pinnacle West is required to give such notice at least 120 days prior to such an equity infusion into APS. The ACC may, but need not, take action on this Notice. If the ACC takes no action within the 120 day notice period, Pinnacle West may thereafter make any such infusions at the Company’s discretion.
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 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. The first summer period under this cost-based mitigation will begin on June 1, 2008. We are awaiting a response from the FERC regarding the approval of our proposed mitigation plan.
     Based upon an analysis of this matter, at this time neither Pinnacle West nor APS believes that this proceeding will have a material adverse effect on its financial position, results of operations or cash flows.
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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 (“SEBRP”), 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 months ended March 31, 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	 	 	Three Months	 	
 	 	Ended March 31,	 	 	Ended March 31,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Service cost-benefits earned during the period	 	$	13	 	 	$	14	 	 	$	5	 	 	$	6	 	
Interest cost on benefit obligation	 	 	27	 	 	 	27	 	 	 	10	 	 	 	10	 	
Expected return on plan assets	 	 	(29	)	 	 	(29	)	 	 	(11	)	 	 	(12	)	
Amortization of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Transition obligation	 	 	—	 	 	 	—	 	 	 	1	 	 	 	1	 	
Prior service cost	 	 	1	 	 	 	1	 	 	 	—	 	 	 	—	 	
Net actuarial loss	 	 	4	 	 	 	4	 	 	 	1	 	 	 	2	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net periodic benefit cost	 	$	16	 	 	$	17	 	 	$	6	 	 	$	7	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Portion of cost charged to expense	 	$	7	 	 	$	8	 	 	$	3	 	 	$	3	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
APS’ share of costs charged to expense	 	$	7	 	 	$	7	 	 	$	3	 	 	$	3	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Contributions
     The contribution to our pension plan in 2008 is estimated to be approximately $50 million. The contribution to our other postretirement benefit plans in 2008 is estimated to be approximately $20 million. 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:

 	•	 	our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electricity service to Native Load	
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 	 	 	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 months ended March 31, 2008 and 2007 and at March 31, 2008 and December 31, 2007 is provided as follows (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
Operating Revenues:	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	623	 	 	$	536	 	
Real estate segment	 	 	48	 	 	 	77	 	
All other (a)	 	 	66	 	 	 	82	 	
 	 	 	 	 	 	 	
Total	 	$	737	 	 	$	695	 	
 	 	 	 	 	 	 	
Net Income (Loss):	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	(6	)	 	$	4	 	
Real estate segment	 	 	(1	)	 	 	9	 	
All other (a)	 	 	3	 	 	 	4	 	
 	 	 	 	 	 	 	
Total	 	$	(4	)	 	$	17	 	

 	 	As of	 	 	As of	 	
 	 	March 31, 2008	 	 	December 31, 2007	 	
Assets:	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	10,399	 	 	$	10,356	 	
Real estate segment	 	 	658	 	 	 	661	 	
All other (a)	 	 	141	 	 	 	145	 	
 	 	 	 	 	 	 	
Total	 	$	11,198	 	 	$	11,162	 	

			
(a)	 	Includes activities related to marketing and trading, APSES and El Dorado. None of these segments is a reportable segment.	
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Income Taxes
     As a result of a change in IRS guidance, we 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. Our 2001 federal consolidated income tax return is currently under examination by the IRS. As part of its ongoing examination, the IRS is reviewing this accounting method change and the resultant deduction. Within the next three months, we expect that the IRS will finalize its examination of the 2001 return, which will include a settlement on the tax accounting method change. Although the ultimate outcome of this matter cannot currently be predicted, as a result of the current status of the examination, we have increased by approximately $13 million our estimate of the amounts of unrecognized tax benefits included in accrued taxes and other deferred credits on the Condensed Consolidated Balance Sheets at March 31, 2008. We do not expect the ultimate outcome of this examination to have a material adverse impact on our financial position or results of operations. We expect that it will have a negative impact on cash flows, but do not believe it will materially affect our ability to meet our on-going capital requirements. We do not expect that there will be any other significant increases or decreases in our unrecognized tax benefits within the next 12 months.
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 March 31, 2008, APS would have been required to assume approximately $194 million of debt and pay the equity participants approximately $170 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 March 31, 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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 months ended March 31, 2008 and 2007 are comprised of the following (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	
 	 	March 31,	
 	 	2008	 	2007	
Gains on the ineffective portion of derivatives qualifying for hedge accounting	 	$	1,090	 	 	$	911	 	
Gains from the discontinuance of cash flow hedges	 	 	—	 	 	 	314	 	
     During the next twelve months ending March 31, 2009, we estimate that a net gain of $101 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 amounts 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):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	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	 	$	97,373	 	 	$	(39,768	)	 	$	57,605	 	
Current Assets — Other current assets	 	 	34,738	 	 	 	(750	)	 	 	33,988	(a)	
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	 	
 	 	
(a)	This balance also includes $7 million of “Assets held for sale” presented separately in this filing.	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	As originally	 	Reclassifications	 	 	
 	 	reported in the	 	as a result of the	 	 	
Statement of Cash Flows —	 	March 31, 2007	 	adoption of	 	After adoption	
Three months ended March 31, 2007	 	Form 10-Q	 	FIN 39-1	 	of FIN 39-1	
Change in risk management and trading — assets	 	$	54,689	 	 	$	(34,974	)	 	$	19,715	 	
Change in risk management and trading — liabilities	 	 	(480	)	 	 	34,671	 	 	 	34,191	 	
Collateral	 	 	(303	)	 	 	303	 	 	 	—	 	
     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	 	
March 31, 2008	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	(Liability)	 	
Mark-to-market	 	$	195,049	 	 	$	108,702	 	 	$	(22,416	)	 	$	(11,121	)	 	$	270,214	 	
Margin account liability	 	 	(62,049	)	 	 	—	 	 	 	(500	)	 	 	—	 	 	 	(62,549	)	
Collateral provided to counterparties	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Collateral provided from counterparties	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	133,000	 	 	$	108,702	 	 	$	(22,916	)	 	$	(11,121	)	 	$	207,665	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	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. The margin account was a liability of $56 million at March 31, 2008 and an asset of $31 million at December 31, 2007 and is included in the margin account in the table above. 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.
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 19% of Pinnacle West’s $242 million of risk management and trading assets as of March 31, 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 months ended March 31, 2008 and 2007 are as follows (dollars in thousands):
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	
 	 	Three Months	 	
 	 	Ended March 31,	 	
 	 	2008	 	 	2007	 	
Net income (loss)	 	$	(4,473	)	 	$	16,530	 	
 	 	 	 	 	 	 	
Other comprehensive income (loss):	 	 	 	 	 	 	 	 	
Net unrealized gains on derivative instruments (a)	 	 	119,806	 	 	 	62,560	 	
Net reclassification of realized gains on derivative instruments to income (b)	 	 	(2,065	)	 	 	(5,013	)	
Reclassification of pension and other postretirement benefits to income	 	 	1,043	 	 	 	251	 	
Net income tax expense related to items of other comprehensive income	 	 	(46,481	)	 	 	(22,570	)	
 	 	 	 	 	 	 	
Total other comprehensive income	 	 	72,303	 	 	 	35,228	 	
 	 	 	 	 	 	 	
Comprehensive income	 	$	67,830	 	 	$	51,758	 	

			
(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.	
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.
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     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 March 31, 2008, APS had a regulatory liability of $15 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. The FERC is still considering the evidence and refund amounts have not yet been finalized. However, on September 6, 2005, the Ninth Circuit issued a decision, concluding that the FERC may not order refunds from entities that are not within the FERC’s jurisdiction. Because a number of the entities owing refunds under the FERC’s calculations are not within the FERC’s jurisdiction, this order may affect the level of recovery of refunds due in this proceeding. In addition, on August 8, 2005, the FERC issued an order allowing sellers in the California markets to demonstrate that its refund methodology results in an overall revenue shortfall for their transactions in the relevant markets over a specified time frame. More than twenty sellers made such cost recovery filings on September 14, 2005. On January 26, 2006, the FERC conditionally accepted thirteen of these filings, reducing the refund liability for these sellers. Correspondingly, this will reduce the recovery of total refunds in the California markets. On August 2, 2006, the Ninth Circuit issued a decision on the appropriate temporal scope and the type of transactions that are properly subject to the refund orders. In the decision, the Court preserved the scope of the FERC’s existing refund proceedings, but also expanded it potentially to include additional transactions, remanding the orders to the FERC for further proceedings. Various parties filed petitions for rehearing on this order. In addition, on December 19, 2006, the Ninth Circuit issued a decision on the appropriate standard of review at the FERC on wholesale power contracts in the refund proceedings, specifically addressing the application of the so-called “just and reasonable” standard as opposed to the “public interest” standard. In so doing, the Ninth Circuit remanded the matter back to the FERC with the requirement that the FERC review the refund matter using the appropriate standard of review. Several parties sought rehearing of this decision at the Ninth Circuit. Like the August 2, 2006 Ninth Circuit decision, the December 19, 2006 decision has the potential to expand the existing FERC refund proceedings. A settlement, resolving APS’ issues with certain California parties for the current refund period, was filed with the FERC on May 2, 2008, which will be followed by a sixty-day comment period at the FERC. We currently believe the refund claims at the FERC related to the parties not involved in this settlement, as well as the claims related to the parties involved in the settlement, will have no material adverse impact on our financial position, results of operations or cash flows.
     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 the present under market-based rates. The complaint requests the FERC to require the wholesale sellers to refund any rates that are “found to exceed just and reasonable levels.” This complaint was dismissed by the FERC, and the State of California appealed the matter to the Ninth Circuit Court of Appeals. In an
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order issued September 9, 2004, the Ninth Circuit upheld the FERC’s authority to permit market-based rates, but rejected the FERC’s claim that it was without authority to consider retroactive refunds when a utility has not strictly adhered to the quarterly reporting requirements of the market-based rate system. On September 9, 2004, the Ninth Circuit remanded the case to the FERC for further proceedings. Following several years of procedural activity, on March 20, 2008, the FERC re-opened its proceedings. We believe that, once the settlement mentioned above is approved by the FERC, this matter also will be dismissed as to APS. Accordingly, we currently believe that the outcome of these further proceedings 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 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 have sought rehearing of this order, and that request is pending. Under the pending settlement agreement mentioned above, filed with the FERC on May 2, 2008, these parties will withdraw their request for rehearing once the settlement is approved by the FERC.
     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 on December 17, 2007. Although the FERC ruling in this matter is being appealed and the FERC has not yet calculated the specific refund amounts at issue, 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.
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     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. APS cannot currently predict the outcome of this matter.
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 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.
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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 $21.1 million. 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 months ended March 31, 2008 and 2007 (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended March 31,	 	
 	 	2008	 	 	2007	 	
Other income:	 	 	 	 	 	 	 	 	
Interest income	 	$	2,243	 	 	$	3,413	 	
SunCor other income (a)	 	 	1,596	 	 	 	579	 	
Miscellaneous	 	 	9	 	 	 	520	 	
 	 	 	 	 	 	 	
Total other income	 	$	3,848	 	 	$	4,512	 	

Other expense:	 	 	 	 	 	 	 	 	
Non-operating costs	 	$	(1,930	)	 	$	(3,311	)	
Investment losses — net	 	 	(2,668	)	 	 	(1,739	)	
Miscellaneous	 	 	(310	)	 	 	(1,303	)	
 	 	 	 	 	 	 	
Total other expense	 	$	(4,908	)	 	$	(6,353	)	

			
(a)	 	Includes equity earnings from a real estate joint venture that is a pass-through entity for tax purposes.	
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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 March 31, 2008 are as follows (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Guarantees	 	 	Surety Bonds	 	
 	 	 	 	 	 	Term	 	 	 	 	 	 	Term	 	
 	 	Amount	 	 	(in years)	 	 	Amount	 	 	(in years)	 	
Parental:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West Marketing & Trading	 	$	19	 	 	 	1	 	 	$	—	 	 	 	—	 	
APSES	 	 	18	 	 	 	1	 	 	 	17	 	 	 	1	 	
APS	 	 	4	 	 	 	1	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	41	 	 	 	 	 	 	$	17	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     At March 31, 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 March 31, 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 of 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 March 31, 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.
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16. Earnings Per Share
     The following table presents earnings per weighted average common share outstanding for the three months ended March 31, 2008 and 2007:
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
Basic earnings per share:	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	(0.05	)	 	$	0.16	 	
Income from discontinued operations	 	 	0.01	 	 	 	0.01	 	
 	 	 	 	 	 	 	
Earnings per share — basic	 	$	(0.04	)	 	$	0.17	 	

Diluted earnings per share:	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	(0.05	)	 	$	0.16	 	
Income from discontinued operations	 	 	0.01	 	 	 	—	 	
 	 	 	 	 	 	 	
Earnings per share — diluted	 	$	(0.04	)	 	$	0.16	 	
 	 	 	 	 	 	 	
     For the three months ended March 31, 2008, the weighted average common shares outstanding were the same for both basic and diluted shares. There were 703,875 outstanding options to purchase shares of common stock that were excluded from the computation of diluted earnings per share because the impact of including those options would be antidilutive.
     Dilutive stock options and performance shares (which are contingently issuable) increased average common shares outstanding by approximately 577,000 shares for the three months ended March 31, 2007. All the outstanding options to purchase shares of common stock were included in the computation of diluted earnings per share because the options’ exercise prices were less than the average market price of the common shares for the three-month period ended March 31, 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. Assets held for sale relate to commercial properties in the amount of $51 million at March 31, 2008 and $7 million at December 31, 2007. Total revenues related to discontinued operations included in Pinnacle West’s Condensed Consolidated Statements of Income for the three months ended March 31, 2008 and 2007 were immaterial.
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
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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 March 31, 2008 and December 31, 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	
  	 	Trust Fund	 	 	Total Unrealized	 	
 	 	Assets	 	 	Gains	 	
March 31, 2008	 	 	 	 	 	 	 	 	
Equity securities — fair value	 	$	159	 	 	$	51	 	
Fixed income securities — fair value	 	 	218	 	 	 	7	 	
Net payables(a)	 	 	(5	)	 	 	—	 	
 	 	 	 	 	 	 	
Total	 	$	372	 	 	$	58	 	
 	 	 	 	 	 	 	
(a)  Net payables relate to pending securities sales and purchases.	 	
 	 	 	 	 	 	 	 	 	
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	
 	 	March 31,	
 	 	2008	 	2007	
Realized gains	 	$	1	 	 	$	1	 	
Realized losses	 	 	(1	)	 	 	(1	)	
Proceeds from the sale of securities	 	 	67	 	 	 	63	 	
     The fair value of fixed income securities, summarized by contractual maturities, at March 31, 2008 is as follows (dollars in millions):
 	 	 	 	 	
Fair Value	 	March 31, 2008	 	
Less than one year	 	$	24	 	
1 year – 5 years	 	 	41	 	
5 years – 10 years	 	 	36	 	
Greater than 10 years	 	 	117	 	
 	 	 	 	
Total	 	$	218	 	
 	 	 	 	
     See Note 20 for a discussion of SFAS No. 157, “Fair Value Measurements,” which we adopted January 1, 2008.
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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 a discussion 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.	
 		
 	•	 	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 March 31, 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):
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Quoted Prices	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	in Active	 	 	Significant	 	 	 	 	 	 	 	 	 	 	 	
 	 	Markets for	 	 	Other	 	 	Significant	 	 	 	 	 	 	 	 	
 	 	Identical	 	 	Observable	 	 	Unobservable	 	 	 	 	 	 	Balance at	 	
 	 	Assets	 	 	Inputs	 	 	Inputs	 	 	Counterparty	 	 	March 31,	 	
 	 	(Level 1)	 	 	(Level 2)	 	 	(Level 3)	 	 	Netting	 	 	2008	 	
Pinnacle West:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Risk management and trading activities (a)	 	$	125	 	 	$	216	 	 	$	50	 	 	$	(87	)	 	$	304	 	
Nuclear decommissioning trust (b)	 	 	38	 	 	 	339	 	 	 	—	 	 	 	—	 	 	 	377	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	163	 	 	$	555	 	 	$	50	 	 	$	(87	)	 	$	681	 	

Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Risk management and trading activities	 	$	(26	)	 	$	(52	)	 	$	(43	)	 	$	87	 	 	$	(34	)	

APS:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Risk management and trading activities (a)	 	$	125	 	 	$	181	 	 	$	40	 	 	$	(82	)	 	$	264	 	
Nuclear decommissioning trust (b)	 	 	38	 	 	 	339	 	 	 	—	 	 	 	—	 	 	 	377	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	163	 	 	$	520	 	 	$	40	 	 	$	(82	)	 	$	641	 	

Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Risk management and trading activities	 	$	(26	)	 	$	(44	)	 	$	(40	)	 	$	82	 	 	$	(28	)	

			
(a)	 	Excludes $62.5 million of margin account liability. See Notes 10 and S-1.	
 		
(b)	 	Excludes $5 million of net payables related to pending securities sales and purchases. See Note 18.	
     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 months ended March 31, 2008 for both Pinnacle West Consolidated and APS (dollars in millions):
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	
 	 	Pinnacle West’s	 	 	APS’	 	
 	 	Net Derivative	 	 	Net Derivative	 	
 	 	Asset (Liability)	 	 	Asset (Liability)	 	
Balance at December 31, 2007	 	$	8	 	 	$	1	 	
Total net gains (losses) realized/ unrealized:	 	 	 	 	 	 	 	 	
Included in earnings	 	 	(2	)	 	 	(2	)	
Included in OCI	 	 	2	 	 	 	2	 	
Deferred as a regulatory asset or liability	 	 	(3	)	 	 	(3	)	
Purchases, issuances, and settlements	 	 	—	 	 	 	—	 	
Transfers in and/or out of Level 3	 	 	2	 	 	 	2	 	
 	 	 	 	 	 	 	
Balance at March 31, 2008	 	$	7	 	 	$	—	 	

Net unrealized losses included in earnings related to instruments still held as of March 31, 2008	 	$	2	 	 	$	3	 	
     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	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
ELECTRIC OPERATING REVENUES	 	$	625,576	 	 	$	538,260	 	
 	 	 	 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	 	 	 	
Fuel and purchased power	 	 	272,053	 	 	 	206,196	 	
Operations and maintenance	 	 	188,135	 	 	 	165,934	 	
Depreciation and amortization	 	 	93,885	 	 	 	87,876	 	
Income taxes	 	 	5,157	 	 	 	3,143	 	
Other taxes	 	 	32,718	 	 	 	34,522	 	
 	 	 	 	 	 	 	
Total	 	 	591,948	 	 	 	497,671	 	
 	 	 	 	 	 	 	
OPERATING INCOME	 	 	33,628	 	 	 	40,589	 	

OTHER INCOME (DEDUCTIONS)	 	 	 	 	 	 	 	 	
Income taxes	 	 	1,115	 	 	 	754	 	
Allowance for equity funds used during construction	 	 	6,124	 	 	 	4,444	 	
Other income (Note S-3)	 	 	2,064	 	 	 	4,433	 	
Other expense (Note S-3)	 	 	(5,888	)	 	 	(4,904	)	
 	 	 	 	 	 	 	
Total	 	 	3,415	 	 	 	4,727	 	

INTEREST DEDUCTIONS	 	 	 	 	 	 	 	 	
Interest on long-term debt	 	 	42,173	 	 	 	40,075	 	
Interest on short-term borrowings	 	 	3,849	 	 	 	1,981	 	
Debt discount, premium and expense	 	 	1,160	 	 	 	1,156	 	
Allowance for borrowed funds used during construction	 	 	(3,775	)	 	 	(2,213	)	
 	 	 	 	 	 	 	
Total	 	 	43,407	 	 	 	40,999	 	

NET INCOME (LOSS)	 	$	(6,364	)	 	$	4,317	 	
 	 	 	 	 	 	 	
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)
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	 	December 31,	 	
 	 	2008	 	 	2007	 	
ASSETS	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
UTILITY PLANT	 	 	 	 	 	 	 	 	
Electric plant in service and held for future use	 	$	11,706,623	 	 	$	11,582,862	 	
Less accumulated depreciation and amortization	 	 	4,006,235	 	 	 	3,994,777	 	
 	 	 	 	 	 	 	
Net	 	 	7,700,388	 	 	 	7,588,085	 	
 	 	 	 	 	 	 	 	 	
Construction work in progress	 	 	590,880	 	 	 	622,693	 	
Intangible assets, net of accumulated amortization	 	 	102,500	 	 	 	105,225	 	
Nuclear fuel, net of accumulated amortization	 	 	94,311	 	 	 	69,271	 	
 	 	 	 	 	 	 	
Total utility plant	 	 	8,488,079	 	 	 	8,385,274	 	

INVESTMENTS AND OTHER ASSETS	 	 	 	 	 	 	 	 	
Nuclear decommissioning trust (Note 18)	 	 	371,500	 	 	 	379,347	 	
Assets from long-term risk management and trading activities (Note S-1)	 	 	101,032	 	 	 	41,603	 	
Other assets	 	 	68,600	 	 	 	69,570	 	
 	 	 	 	 	 	 	
Total investments and other assets	 	 	541,132	 	 	 	490,520	 	

CURRENT ASSETS	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	 	7,737	 	 	 	52,151	 	
Customer and other receivables	 	 	345,669	 	 	 	402,244	 	
Allowance for doubtful accounts	 	 	(3,677	)	 	 	(4,265	)	
Materials and supplies (at average cost)	 	 	164,003	 	 	 	149,759	 	
Fossil fuel (at average cost)	 	 	24,966	 	 	 	27,792	 	
Assets from risk management and trading activities (Note S-1)	 	 	100,825	 	 	 	34,087	 	
Deferred income taxes	 	 	—	 	 	 	38,707	 	
Other current assets	 	 	18,841	 	 	 	16,545	 	
 	 	 	 	 	 	 	
Total current assets	 	 	658,364	 	 	 	717,020	 	

DEFERRED DEBITS	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power regulatory asset	 	 	50,497	 	 	 	110,928	 	
Other regulatory assets	 	 	502,803	 	 	 	514,353	 	
Unamortized debt issue costs	 	 	23,864	 	 	 	24,373	 	
Other deferred debits	 	 	85,370	 	 	 	78,934	 	
 	 	 	 	 	 	 	
Total deferred debits	 	 	662,534	 	 	 	728,588	 	

TOTAL ASSETS	 	$	10,350,109	 	 	$	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)
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	 	December 31,	 	
 	 	2008	 	 	2007	 	
LIABILITIES AND EQUITY	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
CAPITALIZATION	 	 	 	 	 	 	 	 	
Common stock	 	$	178,162	 	 	$	178,162	 	
Additional paid-in capital	 	 	2,105,466	 	 	 	2,105,466	 	
Retained earnings	 	 	1,027,693	 	 	 	1,076,557	 	
Accumulated other comprehensive income (loss) (Note S-2):	 	 	 	 	 	 	 	 	
Pension and other postretirement benefits	 	 	(21,300	)	 	 	(21,782	)	
Derivative instruments	 	 	79,945	 	 	 	13,038	 	
 	 	 	 	 	 	 	
Common stock equity	 	 	3,369,966	 	 	 	3,351,441	 	
Long-term debt less current maturities (Note 4)	 	 	2,876,862	 	 	 	2,876,881	 	
 	 	 	 	 	 	 	
Total capitalization	 	 	6,246,828	 	 	 	6,228,322	 	

CURRENT LIABILITIES	 	 	 	 	 	 	 	 	
Short-term debt	 	 	100,000	 	 	 	218,000	 	
Commercial paper	 	 	90,944	 	 	 	—	 	
Current maturities of long-term debt (Note 4)	 	 	995	 	 	 	978	 	
Accounts payable	 	 	155,841	 	 	 	239,923	 	
Accrued taxes	 	 	433,076	 	 	 	374,444	 	
Accrued interest	 	 	40,563	 	 	 	38,262	 	
Customer deposits	 	 	73,696	 	 	 	71,376	 	
Liabilities from risk management and trading activities (Note S-1)	 	 	17,567	 	 	 	19,921	 	
Deferred income taxes	 	 	25,244	 	 	 	—	 	
Other current liabilities	 	 	83,636	 	 	 	92,802	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	1,021,562	 	 	 	1,055,706	 	

DEFERRED CREDITS AND OTHER	 	 	 	 	 	 	 	 	
Deferred income taxes	 	 	1,193,140	 	 	 	1,250,028	 	
Regulatory liabilities	 	 	728,308	 	 	 	642,564	 	
Liability for asset retirements	 	 	263,653	 	 	 	281,903	 	
Pension and other postretirement liabilities (Note 6)	 	 	478,843	 	 	 	469,945	 	
Customer advances for construction	 	 	110,720	 	 	 	94,801	 	
Unamortized gain — sale of utility plant	 	 	35,462	 	 	 	36,606	 	
Liabilities from long-term risk management and trading activities (Note S-1)	 	 	10,993	 	 	 	4,573	 	
Other	 	 	260,600	 	 	 	256,954	 	
 	 	 	 	 	 	 	
Total deferred credits and other	 	 	3,081,719	 	 	 	3,037,374	 	

COMMITMENTS AND CONTINGENCIES (SEE NOTES)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
TOTAL LIABILITIES AND EQUITY	 	$	10,350,109	 	 	$	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)
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	(6,364	)	 	$	4,317	 	
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
Depreciation and amortization including nuclear fuel	 	 	102,696	 	 	 	96,974	 	
Deferred fuel and purchased power	 	 	9,721	 	 	 	(26,293	)	
Deferred fuel and purchased power amortization	 	 	50,709	 	 	 	68,766	 	
Allowance for equity funds used during construction	 	 	(6,124	)	 	 	(4,444	)	
Deferred income taxes	 	 	(34,793	)	 	 	(15,566	)	
Changes in mark-to-market valuations	 	 	(13,458	)	 	 	(3,507	)	
Changes in current assets and liabilities:	 	 	 	 	 	 	 	 	
Customer and other receivables	 	 	56,686	 	 	 	128,030	 	
Materials, supplies and fossil fuel	 	 	(11,418	)	 	 	(14,438	)	
Other current assets	 	 	163	 	 	 	(2,112	)	
Accounts payable	 	 	(63,888	)	 	 	(92,004	)	
Accrued taxes	 	 	48,936	 	 	 	6,673	 	
Other current liabilities	 	 	(4,545	)	 	 	(6,533	)	
Change in risk management and trading — assets	 	 	93,449	 	 	 	26,299	 	
Change in risk management and trading — liabilities	 	 	6,648	 	 	 	34,114	 	
Change in unrecognized tax benefits	 	 	13,129	 	 	 	—	 	
Change in other long-term assets	 	 	13,200	 	 	 	(21,108	)	
Change in other long-term liabilities	 	 	10,858	 	 	 	6,284	 	
 	 	 	 	 	 	 	
Net cash flow provided by operating activities	 	 	265,605	 	 	 	185,452	 	

CASH FLOWS FROM INVESTING ACTIVITIES	 	 	 	 	 	 	 	 	
Capital expenditures	 	 	(239,808	)	 	 	(193,038	)	
Contributions in aid of construction	 	 	10,040	 	 	 	4,091	 	
Allowance for borrowed funds used during construction	 	 	(3,775	)	 	 	(2,213	)	
Purchases of investment securities	 	 	—	 	 	 	(36,525	)	
Proceeds from sale of investment securities	 	 	—	 	 	 	69,225	 	
Proceeds from nuclear decommissioning trust sales	 	 	67,177	 	 	 	63,490	 	
Investment in nuclear decommissioning trust	 	 	(72,362	)	 	 	(68,675	)	
Other	 	 	(1,489	)	 	 	(826	)	
 	 	 	 	 	 	 	
Net cash flow used for investing activities	 	 	(240,217	)	 	 	(164,471	)	

CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	 	 	 	
Short-term borrowings, net	 	 	(27,056	)	 	 	—	 	
Dividends paid on common stock	 	 	(42,500	)	 	 	—	 	
Repayment and reacquisition of long-term debt	 	 	(246	)	 	 	(287	)	
 	 	 	 	 	 	 	
Net cash flow used for financing activities	 	 	(69,802	)	 	 	(287	)	
 	 	 	 	 	 	 	
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	 	 	(44,414	)	 	 	20,694	 	
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	 	 	52,151	 	 	 	81,870	 	
 	 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS AT END OF PERIOD	 	$	7,737	 	 	$	102,564	 	

Supplemental disclosure of cash flow information	 	 	 	 	 	 	 	 	
Cash paid during the year for:	 	 	 	 	 	 	 	 	
Income taxes, net of refunds	 	$	5,704	 	 	$	44,088	 	
Interest, net of amounts capitalized	 	$	39,946	 	 	$	45,793	 	
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	 	 	—	 	
Changes in Liquidity	 	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 is exposed to the impact of market fluctuations in the commodity price of electricity, natural gas and emissions allowances. As part of its overall risk management program, APS uses various commodity instruments that qualify as derivatives to hedge purchases and sales of electricity, fuels, and emission allowances and credits. As of March 31, 2008, APS hedged exposures to these risks for a maximum of 39 months.
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 months ended March 31, 2008 and 2007 were comprised of the following (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	
 	 	March 31,	
 	 	2008	 	2007	
Gains on the ineffective portion of derivatives qualifying for hedge accounting	 	$	1,090	 	 	$	911	 	
Gains from the discontinuance of cash flow hedges	 	 	—	 	 	 	150	 	
     During the next twelve months ending March 31, 2009, APS estimates that a net gain of $77 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 amounts 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 —	 	March 31, 2007	 	adoption of	 	After adoption	
Three months ended March 31, 2007	 	Form 10-Q	 	FIN 39-1	 	of FIN 39-1	
Change in risk management and trading — assets	 	$	59,181	 	 	$	(32,882	)	 	$	26,299	 	
Change in risk management and trading — liabilities	 	 	(557	)	 	 	34,671	 	 	 	34,114	 	
Collateral	 	 	1,789	 	 	 	(1,789	)	 	 	—	 	
     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):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Investments	 	 	 	 	 	 	Deferred	 	 	 	 	
 	 	Current	 	 	and Other	 	 	Current	 	 	Credits and	 	 	Net Asset	 	
March 31, 2008	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	(Liability)	 	
Mark-to-market	 	$	162,874	 	 	$	101,032	 	 	$	(17,067	)	 	$	(10,993	)	 	$	235,846	 	
Margin account liability	 	 	(62,049	)	 	 	—	 	 	 	(500	)	 	 	—	 	 	 	(62,549	)	
Collateral provided to counterparties	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Collateral provided from counterparties	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	100,825	 	 	$	101,032	 	 	$	(17,567	)	 	$	(10,993	)	 	$	173,297	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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 	 	 	 	 	 	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. The margin account was a liability of $56 million at March 31, 2008 and an asset of $31 million at December 31, 2007 and is included in the margin account in the table above. 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 months ended March 31, 2008 and 2007 are as follows (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
Net income (loss)	 	$	(6,364	)	 	$	4,317	 	
 	 	 	 	 	 	 	
Other comprehensive income (loss):	 	 	 	 	 	 	 	 	
Net unrealized gains on derivative instruments (a)	 	 	107,016	 	 	 	50,545	 	
Net reclassification of realized losses on derivative instruments to income (b)	 	 	3,318	 	 	 	741	 	
Reclassification of pension and other postretirement benefits to income	 	 	795	 	 	 	—	 	
Net income tax expense related to items of other comprehensive income	 	 	(43,740	)	 	 	(20,124	)	
 	 	 	 	 	 	 	
Total other comprehensive income	 	 	67,389	 	 	 	31,162	 	
 	 	 	 	 	 	 	
Comprehensive income	 	$	61,025	 	 	$	35,479	 	
 	 	 	 	 	 	 	
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(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.	
S-3. Other Income and Other Expense
     The following table provides detail of APS’ other income and other expense for the three months ended March 31, 2008 and 2007 (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
Other income:	 	 	 	 	 	 	 	 	
Interest income	 	$	1,723	 	 	$	3,347	 	
Investment gains — net	 	 	—	 	 	 	377	 	
Miscellaneous	 	 	341	 	 	 	709	 	
 	 	 	 	 	 	 	
Total other income	 	$	2,064	 	 	$	4,433	 	

Other expense:	 	 	 	 	 	 	 	 	
Non-operating costs (a)	 	$	(3,322	)	 	$	(3,233	)	
Investment losses — net	 	 	(1,452	)	 	 	—	 	
Asset dispositions	 	 	(395	)	 	 	(1,081	)	
Miscellaneous	 	 	(719	)	 	 	(590	)	
 	 	 	 	 	 	 	
Total other expense	 	$	(5,888	)	 	$	(4,904	)	

			
(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, it is still 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 and inflationary impacts on the capital budget, highlighting APS’ need for the timely recovery through rates of these and other expenditures. On March 24, 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 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 and competitive commodity-related energy services to commercial and industrial retail customers in the western United States. Recently, APSES has de-emphasized its commodity-related energy services. 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 summarizes net income (loss) for the three months ended March 31, 2008 and 2007 (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
Regulated electricity segment	 	$	(6	)	 	$	4	 	
Real estate segment	 	 	(1	)	 	 	9	 	
All other (a)	 	 	3	 	 	 	4	 	
 	 	 	 	 	 	 	
Net income (loss)	 	$	(4	)	 	$	17	 	

			
(a)	 	Includes activities related to marketing and trading, APSES and El Dorado. None of these segments is a reportable segment.	
PINNACLE WEST CONSOLIDATED — RESULTS OF OPERATIONS
Operating Results — Three-month period ended March 31, 2008 compared with three-month period ended March 31, 2007
     Our consolidated net loss for the three months ended March 31, 2008 was $4 million compared with net income of $17 million for the comparable prior-year period. Net income decreased $21 million in the period-to-period comparison and is reflected in the segments as follows:

 	•	 	Regulated Electricity Segment — Net income decreased approximately $10 million primarily due to higher operations and maintenance expense related to increased costs for generation (including more planned overhauls and maintenance) and increased customer service and other costs; and higher depreciation and amortization primarily due to higher plant balances. These negative factors were partially offset by higher retail sales primarily due to customer growth.	
 		
 	•	 	Real Estate Segment — Net income decreased approximately $10 million primarily due to lower land parcel sales resulting from the weak real estate market.	
     Additional details on the major factors that increased (decreased) net income for the three-month period ended March 31, 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:	 	 	 	 	 	 	 	 	
Higher retail sales primarily due to customer growth, excluding weather effects	 	$	6	 	 	$	4	 	
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	 	 	63	 	 	 	38	 	
Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate	 	 	(65	)	 	 	(40	)	
Transmission rate increase	 	 	3	 	 	 	2	 	
Operations and maintenance increases primarily due to:	 	 	 	 	 	 	 	 	
Increased generation costs, including more planned overhauls and maintenance	 	 	(14	)	 	 	(9	)	
Increased customer service and other costs	 	 	(10	)	 	 	(6	)	
Higher depreciation and amortization primarily due to higher plant balances	 	 	(6	)	 	 	(4	)	
Miscellaneous items, net	 	 	10	 	 	 	5	 	
 	 	 	 	 	 	 	
Decrease in regulated electricity segment net income	 	 	(13	)	 	 	(10	)	
Lower real estate segment net income primarily due to lower land parcel sales resulting from the weak real estate market	 	 	(17	)	 	 	(10	)	
Other miscellaneous items, net	 	 	(1	)	 	 	(1	)	
 	 	 	 	 	 	 	
Decrease in net income	 	$	(31	)	 	$	(21	)	
 	 	 	 	 	 	 	
Regulated Electricity Segment Revenues
     Regulated electricity segment revenues were $87 million higher for the three months ended March 31, 2008 compared with the prior-year period primarily because of:

 	•	 	a $63 million increase in retail revenues due to a rate increase effective July 1, 2007;	
 		
 	•	 	a $17 million increase in revenues from Off-System Sales due to higher prices and volumes;	
 		
 	•	 	an $8 million increase in retail revenues primarily related to customer growth, excluding weather effects;	
 		
 	•	 	a $3 million increase due to a transmission rate increase effective March 1, 2008;	
 		
 	•	 	an $18 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 $14 million net increase due to miscellaneous factors.	

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Real Estate Segment Revenues
     Real estate segment revenues were $29 million lower for the three months ended March 31, 2008 compared with the prior-year period primarily because of the weak real estate market.
All Other Revenues
     All other revenues were $16 million lower for the three months ended March 31, 2008 compared with the prior-year period primarily due to a $15 million decrease in marketing and trading revenues as a result of lower mark-to-market gains because of changes in forward prices and lower sales volumes.
      LIQUIDITY AND CAPITAL RESOURCES — Pinnacle West Consolidated
      Operating Cash Flows
     Net cash provided by operating activities was $246 million for the three months ended March 31, 2008, compared with $215 million for the comparable prior-year period, an increase in net cash flow of $31 million. This increase was primarily due to a change in the amount of margin cash collected from counterparties as a result of changes in commodity prices, partially offset by other miscellaneous factors.
      Investing Cash Flows
     Net cash used for investing activities was $248 million for the three months ended March 31, 2008, compared with $184 million for the comparable prior-year period, a decrease in net cash flow of $64 million.
     This cash flow decrease was primarily due to:

 	•	 	An increase in cash used for capital expenditures and capitalized interest of $33 million (see table and discussion below); and	
 		
 	•	 	A decrease of $33 million in net cash proceeds from the sale of securities at APS.	
      Financing Cash Flows
     Net cash used for financing activities was $36 million for the three months ended March 31, 2008, compared with net cash provided by financing activities of $3 million for the comparable prior-year period, a decrease in net cash flow of $39 million.
     This cash flow decrease was primarily due to:

 	•	 	A net decrease of $33 million in short-term borrowings to fund day-to-day operations and liquidity needs; and	
 		
 	•	 	A net decrease of $6 million due to miscellaneous factors.	
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      Liquidity
      Capital Expenditure Requirements
     The following table summarizes the actual capital expenditures for the three months ended March 31, 2007 and 2008 and estimated capital expenditures, net of contributions in aid of construction, for the next three years:
CAPITAL EXPENDITURES
(dollars in millions)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Estimated for the Year Ended	 	
 	 	March 31,	 	 	December 31,	 	
 	 	2007	 	 	2008	 	 	2008	 	 	2009	 	 	2010	 	
APS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Distribution	 	$	97	 	 	$	88	 	 	$	380	 	 	$	340	 	 	$	280	 	
Generation	 	 	45	 	 	 	89	 	 	 	380	 	 	 	390	 	 	 	380	 	
Transmission	 	 	40	 	 	 	37	 	 	 	220	 	 	 	320	 	 	 	290	 	
Other (a)	 	 	1	 	 	 	4	 	 	 	50	 	 	 	40	 	 	 	50	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	183	 	 	 	218	 	 	 	1,030	 	 	 	1,090	 	 	 	1,000	 	
SunCor (b)	 	 	39	 	 	 	15	 	 	 	50	 	 	 	30	 	 	 	100	 	
Other	 	 	1	 	 	 	5	 	 	 	20	 	 	 	20	 	 	 	10	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	223	 	 	$	238	 	 	$	1,100	 	 	$	1,140	 	 	$	1,110	 	

			
(a)	 	Primarily information systems and facilities projects.	
 		
(b)	 	Primarily capital expenditures for residential, land development and retail and office building construction reflected in “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. Installation of new steam generators in Palo Verde Unit 3 was completed in the fourth quarter of 2007 at an approximate cost of $70 million (APS’ share), which completed the steam generator replacement program for all three units. 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 additional environmental expenditures. (See “Business of Arizona Public Service Company —
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Environmental Matters — Regional Haze Rules” in Item 1 of the 2007 Form 10-K.) Generation also includes nuclear fuel expenditures of approximately $90 million to $120 million per year for 2008, 2009 and 2010.
     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, 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 March 31, 2008, APS’ common equity ratio, as defined, was approximately 54%.
     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 $50 million. The expected contribution to our other postretirement benefit plans in 2008 is estimated to be approximately $20 million. APS and other subsidiaries fund their share of the contributions. APS’ share is approximately 96% of both plans.
     On April 22, 2008, the Pinnacle West Board of Directors declared a quarterly dividend of $0.525 per share of common stock, payable on June 2, 2008, to shareholders of record on May 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 during 2008.
      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 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,
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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 three months ended March 31, 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 March 31, 2008, the ratio was approximately 51% for Pinnacle West and 47% for APS. The provisions regarding interest coverage require minimum cash coverage of two times the interest requirements for APS. The interest coverage was approximately 4.7 times under APS’ bank financing agreements as of March 31, 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.
     See Note 4 for further discussions.
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      Credit Ratings
     The ratings of securities of Pinnacle West and APS as of May 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	 	Negative	 	Stable	 	Negative	
 	 	 	 	 	 	 	 	 	 	 	 	 	
APS	 	 	 	 	 	 	 	 	 	 	 	 	
Senior unsecured	 	Baa2	 	BBB-	 	BBB	
Secured lease obligation bonds	 	Baa2	 	BBB-	 	BBB	
Commercial paper	 	P	-2	 	 	 	A-3	 	 	 	F3	 	
Outlook	 	Negative	 	Stable	 	Stable	

(a)	 	Pinnacle West has a shelf registration under SEC Rule 415. Pinnacle West currently has no outstanding, rated senior unsecured securities. However, Moody’s 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 March 31, 2008, APS would have been required to assume approximately $194 million of debt and pay the equity participants approximately $170 million.
      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
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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 $8.0 billion at March 31, 2008 as follows (dollars in billions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2008	 	2009-2010	 	2011-2012	 	Thereafter	 	Total	
$0.5	 	$	0.7	 	 	$	0.7	 	 	$	6.1	 	 	$	8.0	 	
     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 a discussion 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.
     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
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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, purchased power and natural gas 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. Competitive retail sales of energy and energy-related products and services are made by APSES in certain western states that have opened to competition.
      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 and inflationary impacts on the capital budget, highlighting APS’ need for the timely recovery through rates of these and other expenditures. On March 24, 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 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.
      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 three-month period ended March 31, 2008 was 2.0% compared with the prior-year period. Customer growth
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averaged 4.0% a year for the three years 2005 through 2007; and we currently expect customer growth to decline, averaging about 1% to 2% 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 4.8%; adjusted to exclude the effects of weather variations, such retail sales growth averaged 3.8% a year. We currently estimate that total retail electricity sales in kilowatt-hours will grow 1% to 2% 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 the economic conditions mentioned above 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 Expenditures” 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 improve our existing facilities. See “Capital Expenditures” above for information regarding planned additions to our facilities.
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      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.
     The following tables show the net pretax changes in mark-to-market value of our derivative positions for the three months ended March 31, 2008 and 2007 (dollars in millions):
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 	 	Three Months Ended	 	
 	 	March 31,	 	
 	 	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	 	 	13	 	 	 	11	 	
Mark-to-market (gains) losses realized including ineffectiveness during the period	 	 	2	 	 	 	(6	)	
Decrease in regulatory asset	 	 	98	 	 	 	53	 	
Recognized in OCI:	 	 	 	 	 	 	 	 	
Change in mark-to-market gains for future period deliveries (a)	 	 	119	 	 	 	63	 	
Mark-to-market gains realized during the period	 	 	(2	)	 	 	(5	)	
Change in valuation techniques	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	
Mark-to-market of net positions at end of period	 	$	270	 	 	$	131	 	

			
(a)	 	The increases in regulated mark-to-market recorded in OCI are due primarily to increases in forward natural gas prices.	
     The tables below show the net fair value of maturities of our derivative contracts (dollars in millions) at March 31, 2008 by 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	 	$	86	 	 	$	13	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	99	 	
Level 2 - Significant other observable inputs	 	 	71	 	 	 	60	 	 	 	29	 	 	 	4	 	 	 	—	 	 	 	—	 	 	 	164	 	
Level 3 - Significant unobservable inputs	 	 	(2	)	 	 	(10	)	 	 	(6	)	 	 	5	 	 	 	6	 	 	 	14	 	 	 	7	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total by maturity	 	$	155	 	 	$	63	 	 	$	23	 	 	$	9	 	 	$	6	 	 	$	14	 	 	$	270	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     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 March 31, 2008 and December 31, 2007 (dollars in millions):
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 	 	March 31, 2008	 	 	December 31, 2007	 	
 	 	Gain (Loss)	 	 	Gain (Loss)	 	
Mark-to-market changes reported in:	 	Price Up 10%	 	 	Price Down 10%	 	 	Price Up 10%	 	 	Price Down 10%	 	
Earnings	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electricity	 	$	4	 	 	$	(4	)	 	$	3	 	 	$	(3	)	
Natural gas	 	 	4	 	 	 	(4	)	 	 	4	 	 	 	(4	)	
Regulatory asset (liability) or OCI (a)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electricity	 	 	35	 	 	 	(35	)	 	 	45	 	 	 	(45	)	
Natural gas	 	 	112	 	 	 	(112	)	 	 	85	 	 	 	(85	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	155	 	 	$	(155	)	 	$	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.
ARIZONA PUBLIC SERVICE COMPANY — RESULTS OF OPERATIONS
      Operating Results — Three-month period ended March 31, 2008 compared with three-month period ended March 31, 2007
     Our net loss for the three months ended March 31, 2008 was $6 million compared with net income of $4 million for the comparable prior-year period. Net income decreased approximately $10 million primarily due to higher operations and maintenance expense related to increased costs for generation (including more planned overhauls and maintenance) and increased customer service and other costs; and higher depreciation and amortization primarily due to higher plant balance. These negative factors were partially offset by higher retail sales primarily due to customer growth.
     Additional details on the major factors that increased (decreased) net income for the three-month period ended March 31, 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	 	
Higher retail sales primarily due to customer growth, excluding weather effects	 	$	6	 	 	$	4	 	
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	 	 	63	 	 	 	38	 	
Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate	 	 	(65	)	 	 	(40	)	
Transmission rate increase	 	 	3	 	 	 	2	 	
Operations and maintenance increases primarily due to:	 	 	 	 	 	 	 	 	
Increased generation costs, including more planned overhauls and maintenance	 	 	(14	)	 	 	(9	)	
Increased customer service and other costs	 	 	(8	)	 	 	(5	)	
Higher depreciation and amortization primarily due to higher plant balances	 	 	(6	)	 	 	(4	)	
Miscellaneous items, net	 	 	12	 	 	 	4	 	
 	 	 	 	 	 	 	
Decrease in net income	 	$	(9	)	 	$	(10	)	
 	 	 	 	 	 	 	
Regulated Electricity Segment Revenues
     Regulated electricity segment revenues were $87 million higher for the three months ended March 31, 2008 compared with the prior-year period primarily because of:

 	•	 	a $63 million increase in retail revenues due to a rate increase effective July 1, 2007;	
 		
 	•	 	a $17 million increase in revenues from Off-System Sales due to higher prices and volumes;	
 		
 	•	 	an $8 million increase in retail revenues primarily related to customer growth, excluding weather effects;	
 		
 	•	 	a $3 million increase due to a transmission rate increase effective March 1, 2008;	
 		
 	•	 	an $18 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 $14 million net increase due to miscellaneous factors.	

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      LIQUIDITY AND CAPITAL RESOURCES — Arizona Public Service Company
      Operating Cash Flows
     Net cash provided by operating activities was $266 million for the three months ended March 31, 2008, compared with $185 million for the comparable prior year period, an increase in net cash flow of $81 million. This change was primarily due a change in the amount of margin cash collected from counterparties as a result of changes in commodity prices and other miscellaneous factors.
      Investing Cash Flows
     Net cash used for investing activities was $240 million for the three months ended March 31, 2008, compared with $164 million for the comparable prior year period, a decrease in net cash flow of $76 million.
     This cash flow decrease was primarily due to:

 	•	 	An increase of $43 million in cash used for capital expenditures and related capitalized interest costs (see table and discussion above); and	
 		
 	•	 	A decrease of $33 million in net cash proceeds from the sale of securities.	
      Financing Cash Flows
     Net cash used for financing activities was $70 million for the three months ended March 31, 2008, compared with no cash used for the comparable prior year period, a decrease in net cash flow of $70 million.
     The cash flow decrease was primarily due to:

 	•	 	A net decrease of $27 million in short-term borrowings to fund day-to-day operations and liquidity needs; and	
 		
 	•	 	A decrease of $43 million due to the timing of dividends paid.	
     For additional discussion see “LIQUIDITY AND CAPITAL RESOURCES — Pinnacle West Consolidated.”
      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 $7.9 billion at March 31, 2008 as follows (dollars in billions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2008	 	2009-2010	 	2011-2012	 	Thereafter	 	Total	
$0.5	 	$	0.7	 	 	$	0.6	 	 	$	6.1	 	 	$	7.9	 	
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     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.
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 the rate case filed with the ACC on March 24, 2008, as updated on or before June 3, 2008;	
 		
 	•	 	the outcome of regulatory, legislative and judicial proceedings, both current and future, relating to the restructuring of the electric industry and environmental matters (including those relating to climate change);	
 		
 	•	 	the ongoing 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;	
 		
 	•	 	regional economic and market conditions, including the results of litigation and other proceedings resulting from the California and Pacific Northwest energy situations, volatile fuel and purchased power costs, and the completion of generation and transmission construction in the region, which could affect customer growth and the cost of power supplies;	
 		
 	•	 	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;	
 		
 	•	 	our ability to compete successfully outside traditional regulated markets (including the wholesale market);	
 		
 	•	 	changes in accounting principles generally accepted in the United States of America and the interpretation of those principles;	
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 	•	 	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;	
 		
 	•	 	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 Chief Financial Officer, have evaluated the effectiveness of Pinnacle West’s disclosure controls and procedures as of March 31, 2008. Based on that evaluation, Pinnacle West’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle West’s disclosure controls and procedures were effective.
     APS’ management, with the participation of APS’ Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of APS’ disclosure controls and procedures as of March 31, 2008. Based on that evaluation, APS’ Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, APS’ disclosure controls and procedures were effective.
     (b) 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.
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     No change in Pinnacle West’s or APS’ internal control over financial reporting occurred during the fiscal quarter ended March 31, 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 “Federal Implementation Plan — Four Corners” and “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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
     The following table contains information about our purchases of our common stock during the first quarter of 2008.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Total	 	 	 	 	 	 	Total Number of	 	 	 	 	
 	 	Number of	 	 	 	 	 	 	Shares Purchased	 	 	Maximum Number of	 	
 	 	Shares	 	 	Average	 	 	as Part of Publicly	 	 	Shares that May Yet Be	 	
 	 	Purchased	 	 	Price Paid	 	 	Announced Plans	 	 	Purchased Under the	 	
                   Period	 	(1)	 	 	per Share	 	 	or Programs	 	 	Plans or Programs	 	
January 1 – January 31, 2008	 	 	—	 	 	$	—	 	 	 	—	 	 	 	—	 	
February 1 – February 29, 2008	 	 	2,375	 	 	 	36.81	 	 	 	—	 	 	 	—	 	
March 1 – March 31, 2008	 	 	36,623	 	 	 	35.46	 	 	 	—	 	 	 	—	 	

Total	 	 	38,998	 	 	$	35.54	 	 	 	—	 	 	 	—	 	

			
(1)	 	Represents shares of common stock withheld by Pinnacle West to satisfy tax withholding obligations upon the vesting of restricted stock.	
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.
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NRC Inspection
     In early 2007, the NRC placed Palo Verde Unit 3 in the “multiple/repetitive degraded cornerstone” column of the NRC’s Action Matrix, which has resulted in an enhanced NRC inspection regime, including on-site in-depth inspections of Palo Verde equipment and operations. See “Business of Arizona Public Service Company, Nuclear Generating Facility — NRC Inspection” in Item 1 of the 2007 Form 10-K for more information regarding the enhanced inspection regime and related procedures and correspondence between APS and the NRC. On March 31, 2008, APS submitted to the NRC a revision to its improvement plan to address issues raised by the NRC in its Inspection Report. The NRC will continue to provide increased oversight at Palo Verde until the facility demonstrates sustained performance improvement. APS will continue cooperating fully with the NRC throughout this process.
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. We are currently evaluating this matter and investigating whether APS owns land located within this Superfund site. Currently the EPA is only seeking payment from APS and other PRPs for past cleanup-related costs. We have not yet completed our review and are unable to predict the outcome of this matter; however, 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 must submit to the EPA a plan detailing how it will meet its “budget.” In the first phase of the program, beginning in 2010, mercury emissions from all coal-fired power plants in the country will be reduced from a total of 48 tons per year to 38 tons. In 2018, those emissions will be further reduced to 15 tons.
     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. The EPA is expected to ask for a rehearing of the decision and/or 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. It is expected to take the EPA several years to establish its 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. While we continue to monitor this matter, we cannot predict the final outcome of the court’s proceeding (if a rehearing is requested or appeal filed), the response of ADEQ or the scope, timing or impact of any alternate rules that may be proposed 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, we will monitor the type and timing of any necessary equipment installation. The estimated costs expected to be incurred over the
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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 Operation — Capital Expenditures” in Item 2).
      Federal Implementation Plan — Four Corners
     As previously reported, in April 2007, the EPA adopted a source specific FIP to set air quality standards at Four Corners, after which APS filed a petition for review in the United States District Court of Appeals for the Tenth Circuit seeking revisions to the FIP to clarify certain requirements and allow operational flexibility. See “Business of Arizona Public Service Company, Environmental Matters, Federal Implementation Plan — Four Corners FIP” in Item 1 of the 2007 Form 10-K for additional details regarding this matter. Briefing in this case is now complete and the court scheduled oral arguments, as requested by the EPA, to occur in May 2008. We anticipate that the court will issue its opinion before the end of 2008. Although we cannot predict the outcome or the actual timing of these matters, we do not believe that they will have a material adverse impact on our financial position, results of operations or cash flows.
Climate Change
      Legislative and Regulatory Initiatives. In the past several years, the United States Congress has considered bills that would regulate domestic greenhouse gas emissions, but such bills have not yet received sufficient Congressional approval to become law; however, there is growing consensus that some form of regulation or legislation is likely to occur in the near future at the federal level with respect to greenhouse gas emissions. In 2007, the United States Supreme Court ruled that greenhouse gases fit within the Clean Air Act’s broad definition of “air pollutant” and, as a result, the EPA has the authority to regulate greenhouse gas emissions of new motor vehicles under the Clean Air Act. The court held that the only way the EPA can avoid regulating greenhouse gases is if it determines that the emissions do not contribute to climate change, or if the EPA provides a reasonable explanation for why it cannot or will not exercise its discretion to regulate these emissions. While this decision applies only to emissions from new motor vehicles, if the EPA determines that greenhouse gas emissions can reasonably be anticipated to endanger public health or welfare, this determination will likely impact other Clean Air Act programs as well, and could potentially result in new regulatory requirements for our power plants.
     If any emission reduction legislation or regulations are enacted, we will assess our compliance alternatives, which may include replacement of existing equipment, installation of additional pollution control equipment, purchase of allowances, curtailing certain operations, or other actions. Although associated capital expenditures or operating costs resulting from greenhouse gas emission regulations or legislation could be material, we believe that we would be able to recover the costs of these environmental compliance initiatives through our rates.
      Regional Initiative. In 2007, six western states (Arizona, California, New Mexico, Oregon, Utah and Washington) and two Canadian provinces (British Columbia and Manitoba) entered into an accord, the Western Climate Initiative (the “Initiative”), to reduce greenhouse gas emissions from automobiles and certain industries, including utilities. In August 2007, the Initiative participants set a goal of reducing greenhouse gas emissions 15% below 2005 levels by 2020. By August 2008, the Initiative participants intend to develop a plan for implementation of this goal. We believe that the implementation of any such program in Arizona would require legislative action. While we continue to monitor the impact of the Initiative, at the present time we cannot predict what form it will ultimately take, whether it will be implemented or, if it is implemented, what impact it will have on our operations.
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      Company Response to Climate Change Initiatives. While we are currently not subject to state or federal limits on our greenhouse gas emissions, we have undertaken a number of initiatives to address emission concerns, including renewable energy development and the procurement and promotion of programs and rates related to energy conservation, renewable energy use and energy efficiency. APS currently has a diverse portfolio of renewable resources including wind, geothermal, solar and biomass and we are focused on increasing the percentage of our energy that is produced by renewable resources. (See “Business of Arizona Public Service Company — Alternative Generation Sources” in Item 1 of the 2007 Form 10-K.) In addition, we are currently developing a Climate Management Report to comply with an ACC order in which the ACC directed APS to undertake a climate management plan, carbon emission reduction study and commitment and action plan with public input and ACC review. We expect to complete the report in 2008.
     In January 2008, APS joined the Climate Registry as a Founding Reporter. Founding Reporters are companies that voluntarily join the non-profit organization before May 2008 to measure and report greenhouse gas emissions in a common, accurate and transparent manner consistent across industry sectors and borders. Pinnacle West has also reported, and will continue to report, greenhouse gas emissions in its annual Corporate Responsibility Report, which is available on our website ( www.pinnaclewest.com ). In addition to emissions data, the report provides information related to the Company, its approach to sustainability and its workplace and environmental performance. The information on Pinnacle West’s website, including the Corporate Responsibility Report, is not incorporated by reference into this report.
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Item 6. EXHIBITS
     (a) Exhibits
 	 	 	 	 	 	 	 	 	
Exhibit No.	 	Registrant(s)	 	Description	
 	 	 	 	 	 	 	 	 	
 	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	
 	 	 	 	 	 	 	 	 	
 	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	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit 1	 	Filed	
 	 	 	 	 	 	 	 	 	
3.1	 	Pinnacle West	 	Articles of Incorporation, restated as of May 23, 2007	 	4.1 to Pinnacle West/APS May 23, 2007 Form 8-K Report, File Nos. 1-8962 and 1-4473	 	5-25-07	
 	 	 	 	 	 	 	 	 	
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: May 8, 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: May 8, 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) 	 	
 	
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Exhibit 12.1
PINNACLE WEST CAPITAL CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months	 	 	 	 	
 	 	Ended	 	 	 	 	
 	 	March 31,	 	 	Twelve Months Ended December 31,	 	
 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	 	2004	 	 	2003	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	(4,668	)	 	$	301,132	 	 	$	317,143	 	 	$	223,163	 	 	$	246,590	 	 	$	225,384	 	
Income taxes	 	 	(557	)	 	 	152,447	 	 	 	156,418	 	 	 	126,892	 	 	 	136,142	 	 	 	102,202	 	
Fixed charges	 	 	61,222	 	 	 	235,705	 	 	 	225,119	 	 	 	214,430	 	 	 	214,803	 	 	 	225,041	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Earnings	 	$	55,997	 	 	$	689,284	 	 	$	698,680	 	 	$	564,485	 	 	$	597,535	 	 	$	552,627	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	$	54,766	 	 	$	208,521	 	 	$	196,826	 	 	$	185,087	 	 	$	183,527	 	 	$	193,973	 	
Estimated interest portion of annual rents	 	 	6,456	 	 	 	27,184	 	 	 	28,293	 	 	 	29,343	 	 	 	31,276	 	 	 	31,068	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Fixed Charges	 	$	61,222	 	 	$	235,705	 	 	$	225,119	 	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	

Ratio of Earnings to Fixed Charges (rounded down)	 	 	0.91	 	 	 	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)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months	 	 	 	 	
 	 	Ended	 	 	 	 	
 	 	March 31,	 	 	Twelve Months Ended December 31,	 	
 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	 	2004	 	 	2003	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	(6,364	)	 	$	283,940	 	 	$	269,730	 	 	$	170,479	 	 	$	199,627	 	 	$	180,937	 	
Income taxes	 	 	4,042	 	 	 	151,157	 	 	 	138,927	 	 	 	98,010	 	 	 	120,030	 	 	 	86,854	 	
Fixed charges	 	 	53,574	 	 	 	202,044	 	 	 	191,174	 	 	 	178,437	 	 	 	181,372	 	 	 	181,793	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Earnings	 	$	51,252	 	 	$	637,141	 	 	$	599,831	 	 	$	446,926	 	 	$	501,029	 	 	$	449,584	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	$	46,022	 	 	$	170,594	 	 	$	158,769	 	 	$	145,502	 	 	$	146,983	 	 	$	147,610	 	
Amortization of debt discount	 	 	1,160	 	 	 	4,639	 	 	 	4,363	 	 	 	4,085	 	 	 	4,854	 	 	 	3,337	 	
Estimated interest portion of annual rents	 	 	6,392	 	 	 	26,811	 	 	 	28,042	 	 	 	28,850	 	 	 	29,535	 	 	 	30,846	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Fixed Charges	 	$	53,574	 	 	$	202,044	 	 	$	191,174	 	 	$	178,437	 	 	$	181,372	 	 	$	181,793	 	

Ratio of Earnings to Fixed Charges (rounded down)	 	 	0.95	 	 	 	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)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months	 	 	 	 	
 	 	Ended	 	 	 	 	
 	 	March 31,	 	 	Twelve Months Ended December 31,	 	
 	 	2008	 	 	2007	 	 	2006	 	 	2005	 	 	2004	 	 	2003	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	(4,668	)	 	$	301,132	 	 	$	317,143	 	 	$	223,163	 	 	$	246,590	 	 	$	225,384	 	
Income taxes	 	 	(557	)	 	 	152,447	 	 	 	156,418	 	 	 	126,892	 	 	 	136,142	 	 	 	102,202	 	
Fixed charges	 	 	61,222	 	 	 	235,705	 	 	 	225,119	 	 	 	214,430	 	 	 	214,803	 	 	 	225,041	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Earnings	 	$	55,997	 	 	$	689,284	 	 	$	698,680	 	 	$	564,485	 	 	$	597,535	 	 	$	552,627	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	$	54,766	 	 	$	208,521	 	 	$	196,826	 	 	$	185,087	 	 	$	183,527	 	 	$	193,973	 	
Estimated interest portion of annual rents	 	 	6,456	 	 	 	27,184	 	 	 	28,293	 	 	 	29,343	 	 	 	31,276	 	 	 	31,068	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Fixed Charges	 	$	61,222	 	 	$	235,705	 	 	$	225,119	 	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	

Preferred Stock Dividend Requirements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before income taxes	 	$	(5,225	)	 	$	453,579	 	 	$	473,561	 	 	$	350,055	 	 	$	382,732	 	 	$	327,586	 	
Net income (loss) from continuing operations	 	 	(4,668	)	 	 	301,132	 	 	 	317,143	 	 	 	223,163	 	 	 	246,590	 	 	 	225,384	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of income (loss) before income taxes to net income	 	 	1.119	 	 	 	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	 	$	61,222	 	 	$	235,705	 	 	$	225,119	 	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	
Preferred stock dividend requirements	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Fixed Charges and Preferred Stock Dividend Requirements	 	$	61,222	 	 	$	235,705	 	 	$	225,119	 	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	

Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (rounded down)	 	 	0.91	 	 	 	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: May 8, 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: May 8, 2008.

 	/s/ Donald E. Brandt  	 	
 	Donald E. Brandt 	 	
 	President, Chief Operating Officer and Principal Financial Officer 	 	
 	
 2 

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: May 8, 2008.

 	/s/ Donald E. Brandt  	 	
 	Donald E. Brandt 	 	
 	President, Chief Executive Officer and Principal Financial Officer 	 	
 	
 2 

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 March 31, 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: May 8, 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 March 31, 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: May 8, 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 March 31, 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: May 8, 2008.

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