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<TYPE>10-Q
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<CONFORMED-NAME>PINNACLE WEST CAPITAL CORP
<CIK>0000764622
<ASSIGNED-SIC>4911
<IRS-NUMBER>860512431
<STATE-OF-INCORPORATION>AZ
<FISCAL-YEAR-END>1231
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<STREET1>400 E VAN BUREN ST PO BOX 52132
<STREET2>P O BOX 52132
<CITY>PHOENIX
<STATE>AZ
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<STATE>AZ
<ZIP>85072-2132
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<FORMER-CONFORMED-NAME>AZP GROUP INC
<DATE-CHANGED>19870506
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<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>e-9180.txt
<DESCRIPTION>QUARTERLY REPORT FOR THE QTR ENDED 9/30/02
<TEXT>
                                    FORM 10-Q
                       Securities and Exchange Commission
                             Washington, D.C. 20549

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________

Commission file number 1-8962

                        PINNACLE WEST CAPITAL CORPORATION
             (Exact name of registrant as specified in its charter)

                       Arizona                                   86-0512431
           (State or other jurisdiction of                    (I.R.S. Employer
            incorporation or organization)                   Identification No.)

400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona         85072-3999
       (Address of principal executive offices)                   (Zip Code)

       Registrant's telephone number, including area code: (602) 250-1000


              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                 Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

                 Number of shares of common stock, no par value,
                 outstanding as of November 12, 2002: 84,755,377
<PAGE>
                                    Glossary

ACC - Arizona Corporation Commission

ACC Staff - Staff of the Arizona Corporation Commission

APS - Arizona Public Service Company, a subsidiary of the Company

APS Energy Services - APS Energy Services Company, Inc., a subsidiary of the
Company

CC&N - Certificate of Convenience and Necessity

Citizens - Citizens Communications Company

Company - Pinnacle West Capital Corporation

CPUC - California Public Utility Commission

EITF - the FASB's Emerging Issues Task Force

El Dorado - El Dorado Investment Company, a subsidiary of the Company

ERMC - the Company's Energy Risk Management Committee

FASB - Financial Accounting Standards Board

FERC - United States Federal Energy Regulatory Commission

Financing Application - APS application filed with the ACC on September 16, 2002

Fitch - Fitch, Inc.

Four Corners - Four Corners Power Plant

GAAP - Generally accepted accounting principles in the United States

Interim Financing Application - APS application filed with the ACC on
November 8, 2002

IRS - Internal Revenue Service

ISO - California Independent System Operator

June 2002 10-Q - Pinnacle West Capital Corporation Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 2002

Moody's - Moody's Investors Service

MW - megawatt, one million watts

MWh - megawatt hour

NAC -NAC International Inc., a subsidiary of El Dorado

Native Load - retail and wholesale sales supplied under traditional cost-based
rate regulation

1999 Settlement Agreement - comprehensive settlement agreement related to the
implementation of retail electric competition

Palo Verde - Palo Verde Nuclear Generating Station

Pinnacle West - Pinnacle West Capital Corporation, the Company

Pinnacle West Energy - Pinnacle West Energy Corporation, a subsidiary of the
Company

PG&E - PG&E Corp.

PX - California Power Exchange

Rules - ACC retail electric competition rules

SCE - Southern California Edison

SEC - United States Securities and Exchange Commission

SFAS - Statement of Financial Accounting Standards

SNWA - Southern Nevada Water Authority

SPE - special-purpose entity

Standard & Poor's - Standard & Poor's Corporation

SunCor - SunCor Development Company, a subsidiary of the Company

System - Non-trading energy related activities

T&D - transmission and distribution

Track A Order - ACC order dated September 10, 2002 regarding generation asset
transfers and related issues

Trading - Energy-related activities entered into with the objective of
generating profits on changes in market prices

2001 10-K - Pinnacle West Capital Corporation Annual Report on Form 10-K for the
fiscal year ended December 31, 2001
<PAGE>
                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

                        PINNACLE WEST CAPITAL CORPORATION
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (unaudited)
                    (in thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                            Three Months Ended
                                                                               September 30,
                                                                        --------------------------
                                                                           2002           2001
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
Operating Revenues
  Electric retail segment                                               $   719,361    $   973,398
  Marketing and trading segment                                              87,258        141,674
  Real estate                                                                45,108         43,024
  Other revenues                                                             21,224          2,682
                                                                        -----------    -----------
     Total                                                                  872,951      1,160,778
                                                                        -----------    -----------

Operating Expenses
  Electric retail segment purchased power and fuel                          257,484        499,789
  Marketing and trading segment purchased power and fuel                     43,361         33,714
  Operations and maintenance                                                144,438        150,916
  Real estate operations                                                     44,928         37,803
  Depreciation and amortization                                             108,812        107,932
  Taxes other than income taxes                                              26,757         29,336
  Other expenses                                                             34,146          2,536
                                                                        -----------    -----------
     Total                                                                  659,926        862,026
                                                                        -----------    -----------
Operating Income                                                            213,025        298,752
                                                                        -----------    -----------
Other
  Other income (Note 16)                                                      3,038          1,527
  Other expense (Note 16)                                                   (10,713)        (3,603)
                                                                        -----------    -----------
     Total                                                                   (7,675)        (2,076)
                                                                        -----------    -----------
Interest Expense
  Interest charges                                                           49,465         42,531
  Capitalized interest                                                      (11,015)       (12,450)
                                                                        -----------    -----------
     Total                                                                   38,450         30,081
                                                                        -----------    -----------
Income Before Income Taxes                                                  166,900        266,595
Income Taxes                                                                 65,984        104,096
                                                                        -----------    -----------
Income Before Accounting Change                                             100,916        162,499
Cumulative Effect of a Change in Accounting for Derivatives
  - Net of Income Tax Benefit of $8,099                                          --        (12,446)
                                                                        -----------    -----------
Net Income                                                              $   100,916    $   150,053
                                                                        ===========    ===========

Weighted-Average Common Shares Outstanding - Basic                           84,768         84,721

Weighted-Average Common Shares Outstanding  - Diluted                        84,797         84,909

Earnings Per Weighted-Average Common Share Outstanding
  Income Before Accounting Change - Basic                               $      1.19    $      1.92
  Net Income - Basic                                                           1.19           1.77
  Income Before Accounting Change - Diluted                                    1.19           1.91
  Net Income - Diluted                                                         1.19           1.77

Dividends Declared Per Share                                            $      0.40    $     0.375
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                       2
<PAGE>
                        PINNACLE WEST CAPITAL CORPORATION
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (unaudited)
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                           Nine Months Ended
                                                                              September 30,
                                                                       --------------------------
                                                                           2002           2001
                                                                       -----------    -----------
<S>                                                                    <C>            <C>
Operating Revenues
  Electric retail segment                                              $ 1,596,440    $ 2,125,522
  Marketing and trading segment                                            212,576        633,811
  Real estate                                                              155,445        107,813
  Other revenues                                                            28,382          5,878
                                                                       -----------    -----------
     Total                                                               1,992,843      2,873,024
                                                                       -----------    -----------

Operating Expenses
  Electric retail segment purchased power and fuel                         423,611      1,064,238
  Marketing and trading segment purchased power and fuel                   109,626        320,855
  Operations and maintenance                                               390,864        408,305
  Real estate operations                                                   138,499        101,248
  Depreciation and amortization                                            310,812        318,842
  Taxes other than income taxes                                             81,147         80,101
  Other expenses                                                            39,115          4,027
                                                                       -----------    -----------
     Total                                                               1,493,674      2,297,616
                                                                       -----------    -----------
Operating Income                                                           499,169        575,408
                                                                       -----------    -----------
Other
  Other income (Note 16)                                                    10,313         18,826
  Other expense (Note 16)                                                  (26,782)       (20,108)
                                                                       -----------    -----------
     Total                                                                 (16,469)        (1,282)
                                                                       -----------    -----------
Interest Expense
  Interest charges                                                         141,149        129,103
  Capitalized interest                                                     (39,143)       (35,404)
                                                                       -----------    -----------
     Total                                                                 102,006         93,699
                                                                       -----------    -----------
Income Before Income Taxes                                                 380,694        480,427
Income Taxes                                                               150,656        188,866
                                                                       -----------    -----------
Income Before Accounting Change                                            230,038        291,561
Cumulative Effect of a Change in Accounting for Derivatives
  - Net of Income Tax Benefit of $9,892                                         --        (15,201)
                                                                       -----------    -----------
Net Income                                                             $   230,038    $   276,360
                                                                       ===========    ===========

Weighted-Average Common Shares Outstanding - Basic                          84,768         84,731

Weighted-Average Common Shares Outstanding  - Diluted                       84,859         84,972

Earnings Per Weighted-Average Common Share Outstanding
  Income Before Accounting Change - Basic                              $      2.71    $      3.44
  Net Income - Basic                                                          2.71           3.26
  Income Before Accounting Change - Diluted                                   2.71           3.43
  Net Income - Diluted                                                        2.71           3.25

Dividends Declared Per Share                                           $      1.20    $     1.125
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>
                       PINNACLE WEST CAPITAL CORPORATION
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (unaudited)
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                          Twelve Months Ended
                                                                             September 30,
                                                                       --------------------------
                                                                           2002           2001
                                                                       -----------    -----------
<S>                                                                    <C>            <C>
Operating Revenues
  Electric retail segment                                              $ 2,033,006    $ 2,581,094
  Marketing and trading segment                                            229,996        816,413
  Real estate                                                              216,540        148,519
  Other revenues                                                            34,275          6,640
                                                                       -----------    -----------
     Total                                                               2,513,817      3,552,666
                                                                       -----------    -----------

Operating Expenses
  Electric retail segment purchased power and fuel                         520,236      1,191,788
  Marketing and trading segment purchased power and fuel                   122,980        473,288
  Operations and maintenance                                               512,654        527,206
  Real estate operations                                                   190,713        134,296
  Depreciation and amortization                                            419,873        424,678
  Taxes other than income taxes                                            102,114        103,238
  Other expenses                                                            45,463          4,510
                                                                       -----------    -----------
     Total                                                               1,914,033      2,859,004
                                                                       -----------    -----------
Operating Income                                                           599,784        693,662
                                                                       -----------    -----------
Other
  Other income (Note 16)                                                    17,903         23,108
  Other expense (Note 16)                                                  (40,251)       (38,700)
                                                                       -----------    -----------
     Total                                                                 (22,348)       (15,592)
                                                                       -----------    -----------
Interest Expense
  Interest charges                                                         187,868        172,265
  Capitalized interest                                                     (51,601)       (43,167)
                                                                       -----------    -----------
     Total                                                                 136,267        129,098
                                                                       -----------    -----------
Income Before Income Taxes                                                 441,169        548,972
Income Taxes                                                               175,325        215,099
                                                                       -----------    -----------
Income Before Accounting Change                                            265,844        333,873
Cumulative Effect of a Change in Accounting for Derivatives
  - Net of Income Tax Benefit of $9,892                                         --        (15,201)
                                                                       -----------    -----------
Net Income                                                             $   265,844    $   318,672
                                                                       ===========    ===========

Weighted-Average Common Shares Outstanding - Basic                          84,746         84,730

Weighted-Average Common Shares Outstanding  - Diluted                       84,851         84,984

Earnings Per Weighted-Average Common Share Outstanding
  Income Before Accounting Change - Basic                              $      3.14    $      3.94
  Net Income - Basic                                                          3.14           3.76
  Income Before Accounting Change - Diluted                                   3.13           3.93
  Net Income - Diluted                                                        3.13           3.75

Dividends Declared Per Share                                           $      1.60    $      1.50
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>
                        PINNACLE WEST CAPITAL CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)

                                     ASSETS

                                                     September 30,  December 31,
                                                         2002           2001
                                                      ----------     ----------
                                                      (unaudited)
Current Assets
  Cash and cash equivalents                           $   28,099     $   28,619
  Customer and other receivables--net                    458,702        367,241
  Accrued utility revenues                               103,773         76,131
  Materials and supplies (at average cost)                80,868         81,215
  Fossil fuel (at average cost)                           30,632         27,023
  Assets from risk management and trading
    activities                                            53,389         66,973
  Other current assets                                    91,259         80,203
                                                      ----------     ----------
      Total current assets                               846,722        727,405
                                                      ----------     ----------

Investments and Other Assets
  Real estate investments--net                           424,237        418,673
  Assets from risk management and trading
    activities - long-term                               206,261        200,351
  Other assets                                           252,634        304,453
                                                      ----------     ----------
      Total investments and other assets                 883,132        923,477
                                                      ----------     ----------

Property, Plant and Equipment
  Plant in service and held for future use             8,965,104      8,030,847
  Less accumulated depreciation and amortization       3,447,463      3,290,097
                                                      ----------     ----------
      Total                                            5,517,641      4,740,750
  Construction work in progress                          754,241      1,047,072
  Intangible assets, net of accumulated
    amortization                                         100,561         86,782
  Nuclear fuel, net of accumulated amortization           54,770         49,282
                                                      ----------     ----------
      Net property, plant and equipment                6,427,213      5,923,886
                                                      ----------     ----------

Deferred Debits
  Regulatory assets                                      267,104        342,383
  Other deferred debits                                   83,905         64,597
                                                      ----------     ----------
      Total deferred debits                              351,009        406,980
                                                      ----------     ----------

Total Assets                                          $8,508,076     $7,981,748
                                                      ==========     ==========

See Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
                        PINNACLE WEST CAPITAL CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)

                             LIABILITIES AND EQUITY

                                                     September 30,  December 31,
                                                         2002           2001
                                                      -----------   -----------
                                                      (unaudited)

Current Liabilities
  Accounts payable                                    $   271,297   $   269,124
  Accrued taxes                                           102,285        96,729
  Accrued interest                                         45,116        48,806
  Short-term borrowings                                   317,811       405,762
  Current maturities of long-term debt                    260,303       126,140
  Customer deposits                                        54,659        30,232
  Deferred income taxes                                     3,244         3,244
  Liabilities from risk management and
    trading activities                                     30,396        35,994
  Other current liabilities                               123,912        74,898
                                                      -----------   -----------
      Total current liabilities                         1,209,023     1,090,929
                                                      -----------   -----------

Long-Term Debt Less Current Maturities                  2,879,055     2,673,078
                                                      -----------   -----------

Deferred Credits and Other
  Liabilities from risk management and
    trading activities - long-term                         92,907       207,576
  Deferred income taxes                                 1,222,260     1,064,993
  Unamortized gain - sale of utility plant                 60,628        64,060
  Other                                                   381,673       381,789
                                                      -----------   -----------
      Total deferred credits and other                  1,757,468     1,718,418
                                                      -----------   -----------

Commitments and Contingencies (Note 12)

Common Stock Equity
  Common stock, no par value                            1,534,025     1,531,038
  Retained earnings                                     1,161,157     1,032,850
  Accumulated other comprehensive loss                    (32,652)      (64,565)
                                                      -----------   -----------
      Total common stock equity                         2,662,530     2,499,323
                                                      -----------   -----------

Total Liabilities and Equity                          $ 8,508,076   $ 7,981,748
                                                      ===========   ===========

See Notes to Condensed Consolidated Financial Statements.

                                       6
<PAGE>
                        PINNACLE WEST CAPITAL CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)
                             (dollars in thousands)

                                                            Nine Months Ended
                                                              September 30,
                                                         ----------------------
                                                           2002         2001
                                                         ---------    ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Income before accounting change                          $ 230,038    $ 291,561
  Items not requiring cash
    Depreciation and amortization                          310,812      318,842
    Nuclear fuel amortization                               23,639       22,221
    Deferred income taxes--net                             141,024      (58,936)
    Change in mark-to-market--trading                      (20,937)    (185,521)
    Change in mark-to-market--system                        (1,226)      (8,604)
  Changes in current assets and liabilities
    Customer and other receivables--net                    (65,092)    (111,972)
    Accrued utility revenues                               (27,642)     (28,385)
    Materials, supplies and fossil fuel                     (3,262)     (14,766)
    Other current assets                                   (12,590)      (6,456)
    Accounts payable                                       (14,413)      30,729
    Accrued taxes                                            7,446      254,736
    Accrued interest                                        (3,690)     (14,915)
    Other current liabilities                               69,827      (23,872)
  Change in real estate investments                         (5,008)     (31,481)
  Increase in regulatory assets                             (8,709)     (10,565)
  Change in risk management and trading
    investments - at cost                                  (36,385)      (1,907)
  Customer advances                                         17,132       28,069
  Change in long term assets                               (24,416)     (16,155)
  Change in long term liabilities                          (22,994)       6,162
                                                         ---------    ---------
Net Cash Flow Provided By Operating Activities             553,554      438,785
                                                         ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES
  Trust fund for bond redemption                                --      (72,370)
  Capital expenditures                                    (689,580)    (692,553)
  Capitalized interest                                     (39,143)     (35,404)
  Other--net                                                41,724       30,126
                                                         ---------    ---------
Net Cash Flow Used For Investing Activities               (686,999)    (770,201)
                                                         ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES
  Issuance of long-term debt                               613,757      744,500
  Short-term borrowings and payments--net                  (95,416)     116,625
  Dividends paid on common stock                          (101,727)     (95,341)
  Repayment of long-term debt                             (286,676)    (413,589)
  Other--net                                                 2,987       (5,805)
                                                         ---------    ---------
Net Cash Flow Provided By Financing Activities             132,925      346,390
                                                         ---------    ---------
Net Cash Flow                                                 (520)      14,974
Cash and Cash Equivalents at Beginning of Period            28,619       10,363
                                                         ---------    ---------
Cash and Cash Equivalents at End of Period               $  28,099    $  25,337
                                                         =========    =========

Supplemental Disclosure of Cash Flow Information:
  Cash paid during the period for:
    Interest, net of amounts capitalized                 $ 100,573    $ 101,072
    Income taxes                                         $  47,450    $  32,349

See Notes to Condensed Consolidated Financial Statements.

                                       7
<PAGE>
                        PINNACLE WEST CAPITAL CORPORATION

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries: APS, Pinnacle West Energy, APS Energy Services,
SunCor, and El Dorado. All significant intercompany accounts and transactions
have been eliminated. We have reclassified certain prior year amounts to conform
to the current year presentation (see Note 8).

2.   Our unaudited condensed consolidated financial statements reflect all
adjustments which we believe are necessary for the fair presentation of our
financial position and results of operations for the periods presented. These
adjustments are of a normal recurring nature with the exception of the
cumulative effect of a change in accounting for derivatives (see Note 10). We
suggest that these condensed consolidated financial statements and notes to
condensed consolidated financial statements be read along with the consolidated
financial statements and notes to consolidated financial statements included in
our 2001 10-K.

3.   Weather conditions cause significant seasonal fluctuations in our revenues.
In addition, trading and wholesale marketing activities can have significant
impacts on our results for interim periods. Consequently, results for interim
periods do not necessarily represent results to be expected for the year.

4.   On February 8, 2002, Pinnacle West issued $215 million of 4.5% Notes due
2004. On March 1, 2002, APS issued $375 million of 6.5% Notes due 2012. On March
15, 2002, APS redeemed at maturity $125 million of its First Mortgage Bonds,
8.125% Series due 2002. On April 15, 2002, APS redeemed $122 million of its
First Mortgage Bonds, 8.75% Series due 2024. SunCor's long-term indebtedness
decreased $11 million during the nine months ended September 30, 2002. El
Dorado's long-term indebtedness increased $9 million during the nine months
ended September 30, 2002, due to its consolidation of NAC for financial
reporting purposes (see Note 14). The above items represent the primary changes
in capitalization for the nine months ended September 30, 2002.

On November 1, 2002, Maricopa County, Arizona Pollution Control Corporation
issued $90 million of 5.05% Pollution Control Revenue Refunding Bonds (Arizona
Public Service Company Palo Verde Project) 2002 Series A, due 2029, and loaned
the proceeds to APS pursuant to a loan agreement. The bonds were issued to
refinance $90 million of outstanding pollution control bonds. In addition, see
"ACC Applications" in Note 5 for a discussion of APS applications requesting the
ACC to permit APS to make inter-affiliate loans to, or guarantees in favor of,
Pinnacle West Energy and Pinnacle West.

5.   Regulatory Matters

ELECTRIC INDUSTRY RESTRUCTURING

STATE

     OVERVIEW. On September 21, 1999, the ACC approved Rules that provide a
framework for the introduction of retail electric competition in Arizona. On
September 23, 1999, the ACC approved a comprehensive settlement agreement among
APS and various parties related to the implementation of retail electric
competition in Arizona. Under the Rules, as modified by the 1999 Settlement

                                       8
<PAGE>
Agreement, APS was required to transfer all of its competitive electric assets
and services to an unaffiliated party or parties or to a separate corporate
affiliate or affiliates no later than December 31, 2002. Consistent with that
requirement, APS had been addressing the legal and regulatory requirements
necessary to complete the transfer of its generation assets to Pinnacle West
Energy on or before that date. The Rules also obligated APS to acquire all of
its customers' standard-offer, full-service generation requirements from the
competitive market (with at least 50% of those requirements coming from a
"competitive bidding process") starting in 2003.

     On August 27, 2002, the ACC held an open meeting to consider various issues
relating to retail electric competition in Arizona. At that meeting, the ACC
determined, among other things, that APS would not be permitted to transfer its
generation assets. The ACC stayed indefinitely the competitive bidding
requirements described in the preceding paragraph. Instead, the ACC required
that APS competitively procure, at a minimum, any power needed for its retail
customers that it cannot produce from its existing generation assets. The ACC
ordered the ACC Staff and interested parties to develop a competitive
procurement process by March 1, 2003. For purposes of this competitive
procurement process, the ACC stated that the Pinnacle West Energy generation
assets "shall not be counted as APS assets in determining the amount, timing,
and manner of the competitive solicitation." The ACC ordered the development of
a competitive solicitation process that can begin by March 1, 2003.

     On September 16, 2002, APS filed an application with the ACC requesting the
ACC to allow APS to borrow up to $500 million and to lend the proceeds to
Pinnacle West Energy or to the Company; to guarantee up to $500 million of
Pinnacle West Energy's or the Company's debt; or a combination of both, not to
exceed $500 million in the aggregate. In its application, APS stated that the
ACC's reversal of the generation asset transfer requirement and the resulting
bifurcation of generation assets between APS and Pinnacle West Energy under
different regulatory regimes result in Pinnacle West Energy being unable to
attain investment-grade credit ratings. This, in turn, precludes Pinnacle West
Energy from accessing capital markets to refinance the bridge financing provided
by the Company to fund the construction of Pinnacle West Energy generation
assets or from effectively competing in the wholesale markets. APS noted that
Pinnacle West Energy had previously received investment-grade credit ratings
contingent upon its receipt of APS generation assets and that the Company's
credit ratings could be adversely affected if Pinnacle West Energy is unable to
finance its capital requirements. On November 4, 2002, Standard & Poor's lowered
the Company's senior unsecured debt rating from "BBB" to "BBB-". On November 8,
2002, APS filed an Interim Financing Application with the ACC requesting the ACC
to permit APS to (a) make short-term advances to Pinnacle West in the form of an
inter-affiliate line of credit in the amount of $125 million or (b) guarantee
$125 million of Pinnacle West's short-term debt.

     These regulatory developments and legal challenges to the Rules have raised
considerable uncertainty about the status and pace of retail electric
competition in Arizona. These matters are discussed in more detail below.

     1999 SETTLEMENT AGREEMENT. The following are the major provisions of the
1999 Settlement Agreement, as approved:

     *    APS has reduced, and will reduce, rates for standard-offer service for
          customers with loads less than three MW in a series of annual retail
          electricity price reductions of 1.5% beginning July 1, 1999 through

                                       9
<PAGE>
          July 1, 2003, for a total of 7.5%. The first reduction of
          approximately $24 million ($14 million after income taxes) included a
          July 1, 1999 retail price decrease of approximately $11 million ($7
          million after income taxes) related to a 1996 regulatory agreement.
          Based on the price reductions authorized in the 1999 Settlement
          Agreement, there were also retail price decreases of approximately $28
          million ($17 million after taxes), or 1.5%, effective July 1, 2000;
          approximately $27 million ($16 million after taxes), or 1.5%,
          effective July 1, 2001; and approximately $28 million ($17 million
          after taxes), or 1.5%, effective July 1, 2002. The final 1.5% price
          reduction is to be implemented July 1, 2003. For customers having
          loads of three MW or greater, standard-offer rates have been reduced
          in varying annual increments that total 5% in the years 1999 through
          2002.

     *    Unbundled rates being charged by APS for competitive direct access
          service (for example, distribution services) became effective upon
          approval of the 1999 Settlement Agreement, retroactive to July 1,
          1999, and also became subject to annual reductions beginning January
          1, 2000, that vary by rate class, through January 1, 2004.

     *    There will be a moratorium on retail price changes for standard-offer
          and unbundled competitive direct access services until July 1, 2004,
          except for the price reductions described above and certain other
          limited circumstances. Neither the ACC nor APS will be prevented from
          seeking or authorizing rate changes prior to July 1, 2004 in the event
          of conditions or circumstances that constitute an emergency, such as
          an inability to finance on reasonable terms; material changes in APS'
          cost of service for ACC-regulated services resulting from federal,
          tribal, state or local laws; regulatory requirements; or judicial
          decisions, actions or orders.

     *    APS will be permitted to defer for later recovery prudent and
          reasonable costs of complying with the Rules, system benefits costs in
          excess of the levels included in then-current (1999) rates, and costs
          associated with the "provider of last resort" and standard-offer
          obligations for service after July 1, 2004. These costs are to be
          recovered through an adjustment clause or clauses commencing on July
          1, 2004.

     *    APS' distribution system opened for retail access effective September
          24, 1999. Customers were eligible for retail access in accordance with
          the phase-in adopted by the ACC under the Rules (see "Retail Electric
          Competition Rules" below), including an additional 140 MW being made
          available to eligible non-residential customers. APS opened its
          distribution system to retail access for all customers on January 1,
          2001. The regulatory developments and legal challenges to the Rules
          discussed in this note have raised considerable uncertainty about the
          status and pace of electric competition in Arizona. Although some very
          limited retail competition existed in APS' service area in 1999 and
          2000, there are currently no active retail competitors offering
          unbundled energy or other utility services to APS' customers. As a
          result, we cannot predict when, and the extent to which, additional
          competitors will re-enter APS' service territory.

                                       10
<PAGE>
     *    Prior to the 1999 Settlement Agreement, APS was recovering
          substantially all of its regulatory assets through July 1, 2004,
          pursuant to a 1996 regulatory agreement. In addition, the 1999
          Settlement Agreement states that APS has demonstrated that its
          allowable stranded costs, after mitigation and exclusive of regulatory
          assets, are at least $533 million net present value. APS will not be
          allowed to recover $183 million net present value of the above
          amounts. The 1999 Settlement Agreement provides that APS will have the
          opportunity to recover $350 million net present value through a
          competitive transition charge that will remain in effect through
          December 31, 2004, at which time it will terminate. The costs subject
          to recovery under the adjustment clause described above will be
          decreased or increased by any over/under-recovery due to sales volume
          variances.

     *    APS will form, or cause to be formed, a separate corporate affiliate
          or affiliates and transfer to such affiliate(s) its competitive
          electric assets and services at book value as of the date of transfer,
          and will complete the transfers no later than December 31, 2002. APS
          will be allowed to defer and later collect, beginning July 1, 2004,
          sixty-seven percent of its costs to accomplish the required transfer
          of generation assets to an affiliate. However, as noted above and
          discussed in greater detail below, the ACC unilaterally modified this
          aspect of the 1999 Settlement Agreement by issuing an order preventing
          APS from transferring its generation assets.

     RETAIL ELECTRIC COMPETITION RULES. The Rules approved by the ACC included
the following major provisions:

     *    They apply to virtually all Arizona electric utilities regulated by
          the ACC, including APS.

     *    Effective January 1, 2001, retail access became available to all APS
          retail electricity customers.

     *    Electric service providers that get CC&N's from the ACC can supply
          only competitive services, including electric generation, but not
          electric transmission and distribution.

     *    Affected utilities must file ACC tariffs that unbundle rates for
          noncompetitive services.

     *    The ACC shall allow a reasonable opportunity for recovery of
          unmitigated stranded costs.

     *    Absent an ACC waiver, prior to January 1, 2001, each affected utility
          (except certain electric cooperatives) must transfer all competitive
          electric assets and services to an unaffiliated party or parties or to
          a separate corporate affiliate or affiliates. Under the 1999
          Settlement Agreement, APS received a waiver to allow transfer of its

                                       11
<PAGE>
          competitive electric assets and services to affiliates no later than
          December 31, 2002. However, as noted above and discussed in greater
          detail below, the ACC reversed its decision, as reflected in the
          Rules, to require APS to transfer its generation assets.

     Under the 1999 Settlement Agreement, the Rules are to be interpreted and
applied, to the greatest extent possible, in a manner consistent with the 1999
Settlement Agreement. If the two cannot be reconciled, APS must seek, and the
other parties to the 1999 Settlement Agreement must support, a waiver of the
Rules in favor of the 1999 Settlement Agreement.

     On November 27, 2000, a Maricopa County, Arizona, Superior Court judge
issued a final judgment holding that the Rules are unconstitutional and unlawful
in their entirety due to failure to establish a fair value rate base for
competitive electric service providers and because certain of the Rules were not
submitted to the Arizona Attorney General for certification. The judgment also
invalidates all ACC orders authorizing competitive electric service providers,
including APS Energy Services, to operate in Arizona. We do not believe the
ruling affects the 1999 Settlement Agreement. The 1999 Settlement Agreement was
not at issue in the consolidated cases before the judge. Further, the ACC made
findings related to the fair value of APS' property in the order approving the
1999 Settlement Agreement. The ACC and other parties aligned with the ACC have
appealed the ruling to the Arizona Court of Appeals, as a result of which the
Superior Court's ruling is automatically stayed pending further judicial review.
In a similar appeal concerning the issuance of competitive telecommunications
CC&N's, the Arizona Court of Appeals invalidated rates for competitive carriers
due to the ACC's failure to establish a fair value rate base for such carriers.
That decision was upheld by the Arizona Supreme Court.

     PROVIDER OF LAST RESORT OBLIGATION. Although the Rules allow retail
customers to have access to competitive providers of energy and energy services,
APS is the "provider of last resort" for standard-offer, full-service customers
under rates that have been approved by the ACC. These rates are established
until at least July 1, 2004. The 1999 Settlement Agreement allows APS to seek
adjustment of these rates in the event of emergency conditions or circumstances,
such as the inability to secure financing on reasonable terms; material changes
in APS' cost of service for ACC-regulated services resulting from federal,
tribal, state or local laws; regulatory requirements; or judicial decisions,
actions or orders. Energy prices in the western wholesale market vary and,
during the course of the last two years, have been volatile. At various times,
prices in the spot wholesale market have significantly exceeded the amount
included in APS' current retail rates. In the event of shortfalls due to
unforeseen increases in load demand or generation or transmission outages, APS
may need to purchase additional supplemental power in the wholesale spot market.
Unless APS is able to obtain an adjustment of its rates under the emergency
provisions of the 1999 Settlement Agreement, there can be no assurance that APS
would be able to fully recover the costs of this power.

     GENERIC DOCKET. In January 2002, the ACC opened a "generic" docket to
"determine if changed circumstances require the [ACC] to take another look at
electric restructuring in Arizona." In February 2002, the ACC docket relating to
APS' October 2001 filing was consolidated with several other pending ACC
dockets, including the generic docket. On May 2, 2002, the ACC issued a
procedural order stating that hearings would begin on June 17, 2002 on various
issues ("Track A Issues"), including APS' planned divestiture of generation
assets to Pinnacle West Energy and associated market and affiliate issues. The

                                       12
<PAGE>
procedural order also stated that consideration of the competitive bidding
process (the "Track B Issues") required by the Rules would proceed concurrently
with the Track A Issues.

     TRACK A ORDER

     On September 10, 2002, the ACC issued the Track A Order, which documents
decisions made by the ACC at an open meeting on August 27, 2002. The major
provisions of the Track A Order include, among other things:

Provisions related to the reversal of the generation asset transfer requirement:

     *    The ACC reversed its decision, as reflected in the Rules, to require
          APS to transfer its generation assets either to an unrelated third
          party or to a separate corporate affiliate; and

     *    the ACC unilaterally modified the 1999 Settlement Agreement, which
          authorized APS' transfer of its generating assets, and directed APS to
          cancel its activities to transfer its generation assets to Pinnacle
          West Energy.

     Provisions related to the wholesale competitive energy procurement process
("Track B" issues):

     *    The ACC stayed indefinitely the requirement of the Rules that APS
          acquire 100% of its energy needs for its standard offer customers from
          the competitive market, with at least 50% obtained through a
          competitive bid process;

     *    the ACC established a requirement that APS competitively procure, at a
          minimum, any required power that it cannot produce from its existing
          assets in accordance with the ultimate outcome of the Track B
          proceedings;

     *    the ACC directed the parties to develop a competitive procurement
          ("bidding") process that can begin by March 1, 2003; and

     *    the ACC stated that "the [Pinnacle West Energy] generating assets that
          APS may acquire from [Pinnacle West Energy] shall not be counted as
          APS assets in determining the amount, timing and manner of the
          competitive solicitation" for Track B purposes, thereby bifurcating
          the regulatory treatment of the existing APS assets and the Pinnacle
          West Energy assets.

     On September 30, 2002, APS filed a Motion for Reconsideration of the Track
A Order and on October 17, 2002, the ACC voted to deny that motion. APS intends
to appeal the Track A Order or otherwise seek restitution for the ACC's reversal
of the 1999 Settlement Agreement. Such restitution will also be addressed in
APS' 2003 rate filing with the ACC.

     The ACC Staff has conducted workshops on the Track B issues with various
parties to determine and define the appropriate process to be used for
competitive power procurement. On October 25, 2002, the ACC Staff issued its
report proposing a process by which APS would procure power not supplied by its
own resources. Under the ACC Staff's proposal, we believe APS will be required
to competitively bid for about 1,500 MW of energy on peak. As described above,
the ACC has directed the parties to complete the Track B proceedings such

                                       13
<PAGE>
that the competitive procurement process can begin by March 1, 2003. The ACC
Staff also proposes that Pinnacle West Energy would be able to bid. In addition
to the ACC Staff workshop process, the ACC will conduct evidentiary hearings to
make its final determination on the Track B proceedings. The hearing is
scheduled to begin on November 21, 2002.

ACC APPLICATIONS

     On September 16, 2002, APS filed a Financing Application requesting the ACC
to allow APS to borrow up to $500 million and to lend the proceeds to Pinnacle
West Energy or the Company; to guarantee up to $500 million of Pinnacle West
Energy's or the Company's debt; or a combination of both, not to exceed $500
million in the aggregate. The loan and/or the guarantee would be used to
refinance debt incurred to fund the construction of Pinnacle West Energy
generation assets. The ACC has established a procedural schedule with a hearing
to begin January 8, 2003.

     The Financing Application addresses, among other things, the following
matters:

     *    APS noted that its April 19, 2002 filing with the ACC had sought
          unification of "[Pinnacle West Energy] Assets" (West Phoenix Combined
          Cycle Units 4 and 5, Redhawk Units 1 and 2, and Saguaro Combustion
          Turbine Unit 3) and APS generation assets under a common financial and
          regulatory regime. APS further noted that the Track A Order's language
          regarding the treatment of the Pinnacle West Energy Assets for Track B
          purposes (see the last bullet point under "Track A Order" above)
          appears to postpone a decision regarding the inclusion of the Pinnacle
          West Energy Assets in APS' rate base, thereby effectively precluding
          the consolidation of the Pinnacle West Energy Assets at APS under a
          common financial and regulatory regime at the present time.

     *    APS stated that it did not intend or desire to foreclose the
          possibility that it would acquire all or part of the Pinnacle West
          Energy Assets or that it may propose that the Pinnacle West Energy
          Assets be included in APS' rate base or afforded cost-of-service
          regulatory treatment to the extent the Pinnacle West Energy Assets are
          used by APS customers. APS stated that these issues would be
          appropriate topics in APS' 2003 general rate case and noted that the
          Track A Order specifically stated that the ACC would not pre-judge the
          eventual rate treatment of the Pinnacle West Energy Assets.

     *    APS stated that the Track A Order's reversal of the generation asset
          transfer requirement and the resulting bifurcation of generation
          assets between APS and Pinnacle West Energy under different regulatory
          regimes result in Pinnacle West Energy being unable to attain
          investment-grade credit ratings. This, in turn, precludes Pinnacle
          West Energy from accessing capital markets to refinance the bridge
          financing provided by the Company to fund the construction of the
          Pinnacle West Energy Assets or from effectively competing in the
          wholesale markets. APS noted that Pinnacle West Energy had previously
          received investment-grade credit ratings contingent upon its receipt
          of APS generation assets and that the Company's credit ratings could
          be adversely affected if Pinnacle West Energy is unable to finance its

                                       14
<PAGE>
          capital requirements. On November 4, 2002, Standard & Poor's lowered
          the Company's senior unsecured debt rating from BBB to BBB-.

     *    APS stated that the amount of the requested loan and/or guarantee is
          APS' present estimate of the amount of credit support necessary
          through APS to restore Pinnacle West Energy and the Company to their
          credit status prior to the ACC's issuance of the Track A Order. APS
          further stated that if the requested amount proves to be inadequate,
          APS reserves the right to submit a second financing application
          seeking additional credit support.

     In mid-2003, the Company will need to refinance approximately $550 million
of parent company indebtedness. If the ACC does not grant the approvals
requested in the Financing Application in a timely fashion, the Company would
anticipate taking the following steps, to the extent necessary, in priority
order, although the timing of the Company's liquidity needs may affect the order
of the steps taken:

     *    The reduction of capital expenditures through plant delay and
          cancellation;

     *    The sale of non-core assets; and

     *    The issuance of new debt and, if appropriate, new equity.

     Although we believe it would be inappropriate to discuss specific amounts
for each of the foregoing categories, we estimate the sum of these steps to be
approximately equivalent to the current outstanding debt at the parent company,
which totaled approximately $1.1 billion as of September 30, 2002.

     On November 8, 2002, APS filed an Interim Financing Application with the
ACC requesting a waiver of certain ACC rules to permit APS to (a) make
short-term advances to Pinnacle West in the form of an inter-affiliate line of
credit or (b) guarantee Pinnacle West's short-term debt. In either case, the
waiver would be limited to a maximum aggregate principal amount of $125 million
and for a maximum term of 364 days. In the Interim Financing Application APS
stated that Pinnacle West was facing short-term liquidity needs as a result of
the pending expiration of a $125 million bank facility, which is used as part of
the backup for the Company's $250 million commercial paper program, on November
29, 2002. As of November 12, 2002, the Company had $100 million of commercial
paper outstanding. APS further stated that many of Pinnacle West's lenders have
advised Pinnacle West that they will not renew the expiring facility because
they are unwilling to assume the regulatory risk that the ACC will act on the
Financing Application in a timely and favorable manner, particularly in light of
Standard & Poor's recent lowering of Pinnacle West's senior unsecured debt
rating. APS stressed that Pinnacle West's need for the short-term line of credit
or guarantee was a direct result of the regulatory developments giving rise to
the Financing Application (see above) and stated that the line of credit or
guarantee was designed as a pure liquidity backstop and would be the last
borrowing choice for Pinnacle West. The Company is also evaluating other options
to ensure adequate liquidity. APS requested that the Interim Financing
Application be decided by the ACC on an emergency basis at its November 19, 2002
meeting.

FEDERAL

     In June 2001, the FERC adopted a price mitigation plan that constrains the
price of electricity in the wholesale spot electricity market in the western
United States. The plan, which has a price cap of approximately $90 per MWh and
was originally ordered to remain in effect until September 30, 2002, was
extended to remain in place until October 31, 2002. FERC has adopted a price cap
for the period thereafter of $250 per MWh.

     On July 31, 2002, the FERC issued a Notice of Proposed Rulemaking for
Standard Market Design for wholesale electric markets. We are reviewing the
proposed rulemaking and cannot currently predict what, if any, impact there may
be to the Company if the FERC adopts the proposed rule.

                                       15
<PAGE>
GENERAL

     The regulatory developments and legal challenges to the Rules discussed in
this note have raised considerable uncertainty about the status and pace of
electric competition in Arizona. Although some very limited retail competition
existed in APS' service area in 1999 and 2000, there are currently no active
retail competitors offering unbundled energy or other utility services to APS'
customers. As a result, we cannot predict when, and the extent to which,
additional competitors will re-enter APS' service territory. As competition in
the electric industry continues to evolve, we will continue to evaluate
strategies and alternatives that will position us to compete in the new
regulatory environment.

6.   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 $200 million and the balance by
an industry-wide retrospective assessment program. If losses at any nuclear
power plant covered by the programs exceed the accumulated funds, APS could be
assessed retrospective premium adjustments. The maximum assessment per reactor
under the program for each nuclear incident is approximately $88 million,
subject to an annual limit of $10 million per incident. Based upon APS' interest
in the three Palo Verde units, APS' maximum potential assessment per incident
for all three units is approximately $77 million, with an annual payment
limitation of approximately $9 million.

     The Palo Verde participants maintain "all risk" (including nuclear hazards)
insurance for property damage to, and decontamination of, property at Palo Verde
in the aggregate amount of $2.75 billion, a substantial portion of which must
first be applied to stabilization and decontamination. APS has also secured
insurance against portions of any increased cost of generation or purchased
power and business interruption resulting from a sudden and unforeseen outage of
any of the three units. The insurance coverage discussed in this and the
previous paragraph is subject to certain policy conditions and exclusions.

7.   Business Segments

     We have two principal business segments (determined by products, services
and the regulatory environment), which consist of our regulated retail
electricity business, regulated traditional wholesale electricity business, and
related activities (electric retail business segment) and our competitive
business activities (marketing and trading business segment). Our electric
retail business segment includes activities related to electricity transmission
and distribution, as well as electricity generation. Our marketing and trading
business segment includes activities related to wholesale marketing and trading
and APS Energy Services' commodity-related energy services. The other amounts
include activities related to SunCor and El Dorado. Certain parent company
costs, other than marketing and trading, are included in our electric retail
segment. Financial data for the Company's business segments follows (dollars in
millions):

                                       16
<PAGE>
<TABLE>
<CAPTION>
                                Three Months Ended    Nine Months Ended   Twelve Months Ended
                                   September 30,        September 30,        September 30,
                                ------------------   ------------------   ------------------
                                 2002       2001      2002       2001      2002       2001
                                -------    -------   -------    -------   -------    -------
Operating Revenues:
<S>                             <C>        <C>       <C>        <C>       <C>        <C>
  Electric retail               $   720    $   973   $ 1,597    $ 2,125   $ 2,033    $ 2,581
  Marketing and trading              87        142       213        634       230        817
  Other                              66         46       183        114       251        155
                                -------    -------   -------    -------   -------    -------
         Total                  $   873    $ 1,161   $ 1,993    $ 2,873   $ 2,514    $ 3,553
                                =======    =======   =======    =======   =======    =======

Income Before
Accounting Change:
  Electric retail               $    88    $    99   $   185    $   112   $   222    $   145
  Marketing and trading              24         61        49        175        46        187
  Other                             (11)         2        (4)         4        (2)         2
                                -------    -------   -------    -------   -------    -------
         Total                  $   101    $   162   $   230    $   291   $   266    $   334
                                =======    =======   =======    =======   =======    =======
</TABLE>


                                               As of                 As of
                                        September 30, 2002     December 31, 2001
                                        ------------------     -----------------
          Assets:
            Electric retail                  $ 7,568               $ 7,077
            Marketing and trading                428                   417
            Other                                512                   488
                                             -------               -------
                   Total                     $ 8,508               $ 7,982
                                             =======               =======

8.   Accounting Matters

     In June 2002, the FASB's EITF issued certain guidance related to energy
trading activities in EITF 02-3, "Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities." The new guidance, which was effective July 1, 2002,
required that all energy trading activities within the scope of EITF 98-10,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities," be presented on a net basis in revenues and that prior period
amounts be restated.

                                       17
<PAGE>
     In October 2002, the EITF reached a consensus that gains and losses on
derivative instruments within the scope of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" should be shown net in the income
statement if the derivative is held for trading purposes. This decision
effectively supersedes the guidance provided at the June meeting. Beginning in
the third quarter of 2002, we have netted all of our energy trading activities
on the income statement and have restated prior amounts.

     In the October 2002 meeting, the EITF also rescinded EITF 98-10. This
guidance is effective immediately for all new contracts and on January 1, 2003
for existing contracts. As such, energy trading contracts will be accounted for
on an accrual basis with the associated revenues and costs recorded at the time
the contracted commodities are delivered or received, unless the contracts are
required to be marked to market as derivatives under SFAS No. 133 or if allowed
by other guidance. For existing contracts, we will record a cumulative effect
adjustment in net income for the previously recorded accumulated unrealized
mark-to-market on energy trading contracts that do not meet the definition of a
derivative under SFAS No. 133. We are currently evaluating the impact of this
guidance on our consolidated financial statements.

     In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which we will adopt January 1, 2003. The standard
requires the fair value of asset retirement obligations to be recorded as a
liability, along with an offsetting plant asset, when the obligation is
incurred. Accretion of the liability due to the passage of time will be an
operating expense and the capitalized cost will be depreciated over the useful
life of the long-lived asset.

     We determined that we have asset retirement obligations for our nuclear
facilities (nuclear decommissioning) and certain other fossil generation,
transmission, and distribution assets. The standard is not expected to have a
material impact on net income because the assets with significant retirement
obligations are regulated. We expect to establish a regulatory asset or
liability to offset the impacts of this standard on the regulated assets.

     In 2001, the American Institute of Certified Public Accountants issued an
exposure draft of a proposed Statement of Position, "Accounting for Certain
Costs Related to Property, Plant, and Equipment." This proposed Statement of
Position, which would be effective for us in 2004, would create a project
timeline framework for capitalizing costs related to property, plant and
equipment construction. It would require that property, plant and equipment
assets be accounted for at the component level and require administrative and
general costs incurred in support of capital projects to be expensed in the
current period. The American Institute of Certified Public Accountants plans to
issue the final Statement of Position in early 2003.

     In the third quarter of 2002, we changed to the fair value method of
accounting for stock-based compensation, as provided for in SFAS No. 123,
"Accounting for Stock-Based Compensation". The fair value method of accounting
is the preferred method. In accordance with the transition requirements of SFAS
No. 123, we applied the fair value method prospectively, beginning with 2002
stock grants. We expect to record approximately $500,000 in stock option expense
before income taxes in our consolidated income statement for 2002, approximately

                                       18
<PAGE>
one-half of which was recorded in the third quarter of 2002. This amount may not
be reflective of the stock option expense we record in future years because
stock options typically vest over several years and additional grants are
generally made each year.

     On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." We have no goodwill recorded and have separately disclosed
other intangible assets in our condensed consolidated balance sheets. This new
standard has no material impact on our financial statements, and the required
disclosures are provided in Note 13.

     On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions for the disposal of
a segment of a business. This standard did not impact our financial statements
at adoption.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" which, among other things, supersedes previous guidance for
reporting gains and losses from extinguishment of debt and accounting for
leases. The portion of the statement relating to the early extinguishment of
debt is effective for us beginning in 2003. We do not believe the adoption of
this statement will have a material impact on our financial statements.

     In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The guidance should be applied prospectively to exit or disposal activities
initiated after December 31, 2002.

     See Note 9 for accounting developments related to special-purpose entities.

9.   Off-Balance Sheet Financing

     In 1986, APS entered into agreements with three separate SPE 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. In July 2002, the
FASB issued an exposure draft related to SPEs. It is expected that the FASB will
issue final guidance on accounting for SPEs during the fourth quarter of 2002,
with an immediate effective date for newly-created entities and for all other
entities as of the beginning of the first fiscal period beginning on or after
April 1, 2003. We are currently evaluating the impacts of the exposure draft and
we may be required to consolidate the Palo Verde SPEs in our financial
statements.

     If consolidation were required, the assets and liabilities of the SPEs that
relate to the sale-leaseback transactions would be reflected on our condensed
consolidated balance sheet at fair value on the date of implementation. We are
currently evaluating the impact of including the related fair value of

                                       19
<PAGE>
assets and liabilities. The secured lease obligation bonds that are not
reflected on our condensed consolidated balance sheet at September 30, 2002
total approximately $285 million. The rating agencies have already considered
this debt when evaluating our credit ratings. This is our only significant
off-balance sheet financing activity.

10.  Derivative Instruments and Energy Trading Activities

     We are exposed to the impact of market fluctuations in the price and
transportation costs of electricity, natural gas, coal and emissions allowances.
We employ established procedures to manage risks associated with these market
fluctuations by utilizing various commodity derivatives, including
exchange-traded futures and options and over-the-counter forwards, options, and
swaps. As part of our overall risk management program, we enter into derivative
transactions to hedge purchases and sales of electricity, fuels, and emissions
allowances and credits. The changes in market value of such contracts have a
high correlation to price changes in the hedged commodities. In addition,
subject to specified risk parameters established by our Board of Directors and
monitored by our ERMC, we engage in trading activities intended to profit from
market price movements.

     Effective January 1, 2001, we adopted SFAS No. 133. SFAS No. 133 requires
that entities recognize all derivatives as either assets or liabilities on the
balance sheets and measure those instruments at fair value. Changes in the fair
value of derivative financial instruments are either recognized periodically in
income or shareholders' equity (as a component of other comprehensive income),
depending on whether or not the derivative meets specific hedge accounting
criteria. We use cash flow hedges to limit our exposure to cash flow variability
on forecasted transactions. Hedge effectiveness is related to the degree to
which the derivative contract and the hedged item are correlated. It is measured
based on the relative changes in fair value between the derivative contract and
the hedged item over time. We exclude the time value of certain options from our
assessment of hedge effectiveness. Any change in the fair value resulting from
"ineffectiveness", or the amount by which the derivative contract and the hedge
commodity are not directly correlated, is recognized immediately in net income.

     On January 1, 2001, we recorded a $3 million after-tax loss in net income
and a $65 million after-tax gain in equity (as a component of other
comprehensive income), both as cumulative effects of a change in accounting
principle. The gain resulted from unrealized gains on cash flow hedges.

     In June 2001, the FASB issued new guidance related to electricity
contracts. The effective date of this new guidance was July 1, 2001. As of July
1, 2001, we recorded an additional $12 million after-tax loss in net income and
an additional $8 million after-tax gain in equity (as a component of other
comprehensive income), as a result of adopting the new guidance related to
electricity contracts. The loss resulted primarily from electricity options
contracts. The gain resulted from unrealized gains on cash flow hedges. The
impact of the new guidance was reflected in consolidated net income and other
comprehensive income as cumulative effects of a change in accounting principle.

     In December 2001, the FASB issued revised guidance on the accounting for
electricity contracts with option characteristics and the accounting for
contracts that combine a forward contract and a purchased option contract. The
effective date for the revised guidance was April 1, 2002. The impact of this
guidance was immaterial to our financial statements.

                                       20
<PAGE>
     The changes in derivative fair value included in the condensed consolidated
statements of income for the three, nine and twelve months ended September 30,
2002 and 2001 are comprised of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                     Three Months Ended       Nine Months Ended     Twelve Months Ended
                                       September 30,            September 30,           September 30,
                                    --------------------    --------------------    --------------------
                                      2002        2001        2002        2001        2002        2001
                                    --------    --------    --------    --------    --------    --------
<S>                                 <C>         <C>         <C>         <C>         <C>         <C>
Gains (losses) on the ineffective
  portion of derivatives
  qualifying for hedge
  accounting                        $     42    $ (1,879)   $  1,965    $ (5,748)   $  1,657    $ (5,748)
Gains (losses) from the
  discontinuance of cash flow
  hedges                                  --      (2,417)        (45)     (5,273)        546      (5,273)
Gains (losses) from non-hedge
  derivatives                         (5,513)      1,050      (7,092)     (6,733)     (7,516)     (6,733)
Prior period mark-to-
  market losses realized upon
  delivery of commodities                376      19,880       6,398      26,358       5,986      26,358
                                    --------    --------    --------    --------    --------    --------
Total pretax gain (loss)            $ (5,095)   $ 16,634    $  1,226    $  8,604    $    673    $  8,604
                                    ========    ========    ========    ========    ========    ========
</TABLE>

     As of September 30, 2002, the maximum length of time over which we are
hedging our exposure to the variability in future cash flows for forecasted
transactions is twenty-seven months. During the twelve months ending September
30, 2003, we estimate that a net loss of $14 million before income taxes will be
reclassified from accumulated other comprehensive loss as an offset to the
effect on earnings of market price changes for the related hedged transactions.

     The following table summarizes our assets and liabilities from risk
management and trading activities related to trading and system (retail and
traditional wholesale activities) as of September 30, 2002 (dollars in
thousands):

                                       21
<PAGE>
                   Current                   Current       Other      Net Asset/
                   Assets    Investments   Liabilities  Liabilities  (Liability)
                  ---------  -----------   -----------  -----------  -----------
Mark-to-
  market:
    Trading       $  37,506   $ 133,886     $  (2,613)   $ (10,009)   $ 158,770
    System           15,883           3       (27,783)     (41,865)     (53,762)
Cost: Emission
  allowances
  and other              --      72,372(a)         --      (41,033)      31,339
                  ---------   ---------     ---------    ---------    ---------
Total             $  53,389   $ 206,261     $ (30,396)   $ (92,907)   $ 136,347
                  =========   =========     =========    =========    =========

(a)  Includes $12 million required to counterparties to serve as collateral
     against our open positions on energy-related contracts. The Standard &
     Poor's rating action on November 4, 2002 did not significantly change our
     collateral requirements with counter-parties.

11.  Comprehensive Income

     Components of comprehensive income for the three, nine and twelve months
ended September 30, 2002 and 2001, are as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                 Three Months Ended        Nine Months Ended        Twelve Months Ended
                                    September 30,             September 30,            September 30,
                                ---------------------    ----------------------    ----------------------
                                   2002        2001         2002         2001         2002         2001
                                ---------   ---------    ---------    ---------    ---------    ---------
<S>                             <C>         <C>          <C>          <C>          <C>          <C>
Net income                      $ 100,916   $ 150,053    $ 230,038    $ 276,360    $ 265,844    $ 318,672
                                ---------   ---------    ---------    ---------    ---------    ---------
Other comprehensive income
    (loss):
  Minimum pension liability,
    net of tax                         --          --       (1,835)          --       (2,801)          --
  Cumulative effect of change
    in accounting for
    derivatives, net of tax            --       7,801           --       72,501           --       72,501
  Unrealized gains (losses)
    on hedging derivatives,
    net of tax (a)                  1,446     (11,353)      20,731      (92,493)      22,758      (92,493)
  Reclassification of hedging
    derivatives net realized
    (gains) losses to income,
    net of tax (b)                  2,364     (11,145)      13,017      (46,617)      14,000      (46,617)
                                ---------   ---------    ---------    ---------    ---------    ---------
Total other comprehensive
    income (loss)                   3,810     (14,697)      31,913      (66,609)      33,957      (66,609)
                                ---------   ---------    ---------    ---------    ---------    ---------

Comprehensive income            $ 104,726   $ 135,356    $ 261,951    $ 209,751    $ 299,801    $ 252,063
                                =========   =========    =========    =========    =========    =========
</TABLE>

                                       22
<PAGE>
(a)  These amounts primarily include unrealized gains and losses on contracts
     used to hedge our forecasted gas requirements to serve Native Load.
(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

CALIFORNIA ENERGY MARKET ISSUES AND REFUNDS IN THE PACIFIC NORTHWEST

     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. This order calls for a hearing, with findings of fact due to the
FERC after the ISO and PX provide necessary historical data. The FERC also
ordered an evidentiary proceeding to discuss and evaluate possible refunds for
the Pacific Northwest. The administrative law judge at the FERC in charge of
that evidentiary proceeding made an initial finding that no refunds were
appropriate. The Pacific Northwest issues will now be addressed by the FERC
commissioners. Although the FERC has not yet made a final ruling in the Pacific
Northwest matter nor calculated the specific refund amounts due in California,
we do not expect that the resolution of these issues, as to the amounts alleged
in the proceedings, will have a material adverse impact on our financial
position, results of operations or liquidity.

     SCE and PG&E have publicly disclosed that their liquidity has been
materially and adversely affected because of, among other things, their
inability to pass on to ratepayers the prices each has paid for energy and
ancillary services procured through the PX and the ISO. PG&E filed for
bankruptcy protection in 2001.

     We are closely monitoring developments in the California energy market and
the potential impact of these developments on us and our subsidiaries. We have
evaluated, among other things, SCE's role as a Palo Verde and Four Corners
participant; APS' transactions with the PX and the ISO; contractual
relationships with SCE and PG&E; APS Energy Services' retail transactions
involving SCE and PG&E; and marketing and trading exposures. Based on our
evaluations, we previously reserved $10 million before income taxes for our
credit exposure related to the California energy situation, $5 million of which
was recorded in the fourth quarter of 2000 and $5 million of which was recorded
in the first quarter of 2001. Our evaluations took into consideration our range
of exposure of approximately zero to $38 million before income taxes and review
of likely recovery rates in bankruptcy situations. After review with legal
counsel and review of bond pricing, the $10 million reserve was our best
estimate of our losses.

     In the first quarter of 2002, SCE paid all of its outstanding debts to APS
Energy Services. In the second quarter of 2002, PG&E filed its Modified Second
Amended Disclosure Statement and the CPUC filed its Alternative Plan of
Reorganization. Both plans generally indicated that PG&E would, at the close of
bankruptcy proceedings, be able to pay in full all outstanding, undisputed
debts. As a result of these developments, the probable range of our total
exposure now is approximately zero to $27 million before income taxes, and our
best estimate of the probable loss is now approximately $6 million before income
taxes. Consequently, we reversed $4 million of the $10 million reserve in the
second quarter of 2002. We cannot predict with certainty, however, the impact

                                       23
<PAGE>
that any future resolution or attempted resolution, of the California energy
market situation may have on us, our subsidiaries or the regional energy market
in general.

     CALIFORNIA ENERGY MARKET LITIGATION. On March 19, 2002, the State of
California filed a complaint with the FERC alleging that wholesale sellers of
power and energy, including the Company, failed to properly file rate
information at the FERC in connection with sales to California from 2000 to the
present. STATE OF CALIFORNIA V. BRITISH COLUMBIA POWER EXCHANGE ET. AL., Docket
No. EL02-71-000. The complaint requests the FERC to require the wholesale
sellers to refund any rates that are "found to exceed just and reasonable
levels." This complaint has been dismissed by FERC and the State of California
is now appealing the matter to the Ninth Circuit Court of Appeals. In addition,
the State of California and others have filed various claims, which have now
been consolidated, against several power suppliers to California alleging
antitrust violations. WHOLESALE ELECTRICITY ANTITRUST CASES I AND II, Superior
Court in and for the County of San Diego, Proceedings Nos. 4204-00005 and
4204-00006. Two of the suppliers who were named as defendants in those matters,
Reliant Energy Services, Inc. (and other Reliant entities) and Duke Energy and
Trading, LLP (and other Duke entities), filed cross-claims against various other
participants in the PX and ISO markets, including APS, attempting to expand
those matters to such other participants. APS has not yet filed a responsive
pleading in the matter, but APS believes the claims by Reliant and Duke as they
relate to APS are without merit.

     APS was also named in a lawsuit regarding wholesale contracts in
California. JAMES MILLAR, ET AL. V. ALLEGHENY ENERGY SUPPLY, ET AL., United
States District Court in and for the District of Northern California, Case No.
C02-2855 EMC. The complaint alleges basically that the contracts entered into
were the result of an unfair and unreasonable market. The PX has filed a lawsuit
against the State of California regarding the seizure of forward contracts and
the State has filed a cross complaint against APS and numerous other PX
participants. CAL PX V. THE STATE OF CALIFORNIA Superior Court in and for the
County of Sacramento, JCCP No. 4203. Various preliminary motions are being filed
and we cannot currently predict the outcome of this matter. The "United States
Justice Foundation" is suing numerous wholesale energy contract suppliers to
California, including us, as well as the California Department of Water
Resources, based upon an alleged conflict of interest arising from the
activities of a consultant for Edison International who also negotiated
long-term contracts for the California Department of Water Resources.
MCCLINTOCK, ET AL. V. YUDHRAJA, Superior Court in and for the County of Los
Angeles, Case No. GC 029447. The California Attorney General has indicated that
an investigation by his office did not find evidence of improper conduct by the
consultant. We believe the claims against us in the lawsuits mentioned in this
paragraph are without merit and will have no material adverse impact on our
financial position, results of operations or liquidity.

POWER SERVICE AGREEMENT

     By letter dated March 7, 2001, Citizens, which owns a utility in Arizona,
advised APS that it believes APS overcharged Citizens by over $50 million under
a power service agreement. APS believes that its charges under the agreement
were fully in accordance with the terms of the agreement. In addition, in
testimony filed with the ACC on March 13, 2002, Citizens acknowledged that,
based on its review, "if Citizens filed a complaint with FERC, it probably would
lose the central issue in the contract interpretation dispute." APS and Citizens
terminated the power service agreement effective July 15, 2001. In replacement
of the power service agreement, the Company and Citizens entered into a power
sale agreement under which the Company will supply Citizens with specified
amounts of electricity and ancillary services through May 31, 2008. This new
agreement does not address issues previously raised by Citizens with respect to
charges under the original power service agreement through June 1, 2001.

                                       24
<PAGE>
13.  Intangible Assets

     On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." The Company's gross intangible assets (which are primarily
software) were $203 million at September 30, 2002 and $175 million at December
31, 2001. The related accumulated amortization was $102 million at September 30,
2002 and $88 million at December 31, 2001. Amortization expense for the three
month period ended September 30 was $6 million in 2002 and 2001. Amortization
expense for the nine month period ended September 30 was $14 million in 2002 and
$16 million in 2001. Amortization expense for the twelve-month period ended
September 30 was $20 million in 2002 and $22 million in 2001. Estimated
amortization expense on existing intangible assets over the next five years is
$17 million in 2002, $16 million in 2003, $15 million in 2004, $13 million in
2005 and $11 million in 2006.

14.  El Dorado's Investment in NAC

     NAC develops, markets and contracts for the manufacture of cask designs for
spent nuclear fuel storage and transportation. Prior to the third quarter 2002,
El Dorado's investment in NAC was accounted for under the equity method and El
Dorado's share of earnings and losses through June 2002 were recorded in other
income or expense in the condensed consolidated income statement. Beginning in
the third quarter of 2002, El Dorado fully consolidated NAC's financial
statements after acquiring a controlling interest in NAC as a result of
increased voting representation on NAC's board of directors. El Dorado
consolidated a pretax loss of $13 million in the third quarter of 2002 related
to NAC. In addition, Pinnacle West provided guarantees for credit support
related to NAC in the cumulative amount of $43 million as of September 30, 2002.

                                       25
<PAGE>
15.  Earnings Per Share

     The following table presents earnings per weighted average common share
outstanding (EPS):

<TABLE>
<CAPTION>
                                    Three Months Ended       Nine Months Ended    Twelve Months Ended
                                       September 30,           September 30,         September 30,
                                    -------------------    -------------------    -------------------
                                      2002       2001        2002       2001        2002       2001
                                    --------   --------    --------   --------    --------   --------
<S>                                 <C>        <C>         <C>        <C>         <C>        <C>
Basic EPS:
  Income before accounting change   $   1.19   $   1.92    $   2.71   $   3.44    $   3.14   $   3.94
  Cumulative effect of change in
  accounting                              --      (0.15)         --      (0.18)         --      (0.18)
                                    --------   --------    --------   --------    --------   --------
Earnings per share - basic          $   1.19   $   1.77    $   2.71   $   3.26    $   3.14   $   3.76
                                    ========   ========    ========   ========    ========   ========

Diluted EPS:
  Income before accounting change   $   1.19   $   1.91    $   2.71   $   3.43    $   3.13   $   3.93
  Cumulative effect of change in
  accounting                              --      (0.14)         --      (0.18)         --      (0.18)
                                    --------   --------    --------   --------    --------   --------
Earnings per share - diluted        $   1.19   $   1.77    $   2.71   $   3.25    $   3.13   $   3.75
                                    ========   ========    ========   ========    ========   ========
</TABLE>

     The following table reconciles average common shares outstanding - basic to
average common shares outstanding - diluted that are used in the EPS calculation
in the condensed consolidated income statement (in thousands):

                              Three Months       Nine Months      Twelve Months
                                 Ended             Ended              Ended
                              September 30,     September 30,     September 30,
                             ---------------   ---------------   ---------------
                              2002     2001     2002     2001     2002     2001
                             ------   ------   ------   ------   ------   ------
Average common shares
  outstanding - basic        84,768   84,721   84,768   84,731   84,746   84,730
Dilutive stock options           29      188       91      241      105      254
                             ------   ------   ------   ------   ------   ------
Average common shares
  outstanding - diluted      84,797   84,909   84,859   84,972   84,851   84,984
                             ======   ======   ======   ======   ======   ======

     Options to purchase 2,118,994 shares for the three-month period ended
September 30, 2002, 1,281,721 shares for the nine-month period ended September
30, 2002 and 1,284,063 shares for the twelve-month period ended September 30,
2002 were outstanding but were not included in the computation of EPS because
the options' exercise prices were greater than the average market price of the
common shares. Options to purchase shares of common stock that were not included
in the computation of diluted EPS were 637,872 shares for the three-month period
September 30, 2001, 213,358 shares for the nine-month period September 30, 2001

                                       26
<PAGE>
and 214,006 shares for the twelve-month period September 30, 2001.

16.  Other Income and Other Expense

     The following table provides detail of other income and other expense for
the three, nine and twelve months ended September 30, 2002 and 2001 (dollars in
thousands):

<TABLE>
<CAPTION>
                                Three Months            Nine Months             Twelve Months
                                   Ended                   Ended                   Ended
                                September 30,           September 30,           September 30,
                            --------------------    --------------------    --------------------
                              2002        2001        2002        2001        2002        2001
                            --------    --------    --------    --------    --------    --------
<S>                         <C>         <C>         <C>         <C>         <C>         <C>
Other income
  Environmental
    insurance recovery      $     --    $     --    $     --    $ 10,947    $  1,402    $ 10,947
Interest income                1,863         889       3,749       4,037       6,945       6,951
SunCor joint venture
  earnings                       123         188       3,522       2,669       2,040       3,607
Miscellaneous                  1,052         450       3,042       1,173       7,516       1,603
                            --------    --------    --------    --------    --------    --------
Total other income          $  3,038    $  1,527    $ 10,313    $ 18,826    $ 17,903    $ 23,108
                            ========    ========    ========    ========    ========    ========

Other expense:
  Investment losses -
    net (a)                 $ (4,256)   $   (605)   $ (8,371)   $ (3,083)   $(10,071)   $(10,745)
  Non-operating costs -
    SunCor                        --          --          --      (4,500)     (2,500)     (4,500)
  Non-operating costs (b)     (3,884)     (2,641)    (13,696)     (9,620)    (18,386)    (15,403)
  Miscellaneous               (2,573)       (357)     (4,715)     (2,905)     (9,294)     (8,052)
                            --------    --------    --------    --------    --------    --------
Total other expense         $(10,713)   $ (3,603)   $(26,782)   $(20,108)   $(40,251)   $(38,700)
                            ========    ========    ========    ========    ========    ========
</TABLE>

(a)  Primarily related to El Dorado's investments in NAC in 2002 (see Note 14).
(b)  Primarily below-the-line non-operating utility costs.

17.  2002 Severance Charges

     In July 2002, we announced cost containment measures that included a
voluntary workforce reduction. We recorded $25 million before taxes in voluntary
severance costs in the third quarter of 2002. We expect to record up to $12
million before taxes for additional severance costs in the fourth quarter of
2002.

18.  2002 IRS Tax Refund

     As a result of a change in IRS guidance, we claimed a tax deduction related
to an APS tax accounting method change on the 2001 Federal consolidated income
tax return. The accelerated deduction has resulted in a $200 million reduction
in current tax liability.

                                       27
<PAGE>
19.  Regulatory Accounting

     APS is regulated by the ACC and the FERC. The accompanying condensed
consolidated financial statements reflect the ratemaking policies of these
commissions. For regulated operations, we prepare our financial statements in
accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation." SFAS No. 71 requires a cost-based, rate-regulated enterprise to
reflect the impact of regulatory decisions in its financial statements. EITF
97-4 requires that SFAS No. 71 be discontinued no later than when legislation is
passed or a rate order is used that contains sufficient detail to determine its
effect on the portion of the business being deregulated. In 1999, we
discontinued the application of SFAS No. 71 for APS' generation operations due
to the 1999 Settlement Agreement with the ACC. See Note 5 for a discussion of
the 1999 Settlement Agreement. In the Track A order, the ACC determined that APS
would not be able to transfer its generation assets as provided for in the 1999
Settlement Agreement (see Note 5). Accordingly, we now consider APS generation
to be cost-based, rate-regulated and subject to the requirements of SFAS No. 71.
The impacts of this change were immaterial to our financial statements.

                                       28
<PAGE>
                        PINNACLE WEST CAPITAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

Introduction

     In this section, we explain the results of operations, general financial
condition, and outlook for Pinnacle West and our subsidiaries: APS, Pinnacle
West Energy, APS Energy Services, SunCor, and El Dorado, including:

     *    the changes in our earnings for the three, nine and twelve months
          ended September 30, 2002 and 2001;

     *    the effects of regulatory agreements and developments on our results
          and outlook;

     *    our capital needs, liquidity and capital resources;

     *    our business outlook; and

     *    our management of market risks.

     We suggest this section be read along with the 2001 10-K. Throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, we refer to specific "Notes" in the Notes to Condensed Consolidated
Financial Statements in this report. These Notes add further details to the
discussion. Operating statistics for the periods ended September 30, 2002 and
September 30, 2001 are available on our website (www.pinnaclewest.com) and in
our Current Report on Form 8-K dated September 30, 2002.

OVERVIEW OF OUR BUSINESS

     The Company owns all of the outstanding common stock of APS. APS is an
electric utility that provides retail and wholesale electric service to
substantially all of the state of Arizona, with the major exceptions of the
Tucson metropolitan area and about one-half of the Phoenix metropolitan area.
Electricity is provided through a distribution system owned by APS.

     APS also generates and, through the Company's marketing and trading
division, sells and delivers electricity to wholesale customers in the western
United States. Pinnacle West's marketing and trading division currently sells
into the wholesale market, the APS and Pinnacle West Energy generation output
that is not needed for APS' Native Load, which includes loads for retail
customers and traditional cost-of-service wholesale customers. Subject to
specified risk parameters established by our Board of Directors and the ERMC,
the marketing and trading division also has engaged in activities to hedge
purchases and sales of electricity, fuels, and emissions allowances and credits
and to profit from market price movements. However, as discussed in Note 5, the
ACC has ordered the ACC Staff and interested parties to develop a competitive
procurement process by March 1, 2003 by which APS will competitively procure, at
a minimum, any power needed for its retail customers that it cannot produce from
its existing generation assets. For purposes of this competitive procurement
process, Pinnacle West Energy generation assets are not counted as APS
generation assets. The draft ACC Staff report proposing a competitive
procurement process provides that Pinnacle West Energy would be able to bid.

     Our other major subsidiaries are:

     *    Pinnacle West Energy, through which we conduct our unregulated
          electricity generation operations;

     *    APS Energy Services, which provides commodity-related energy services
          (such as direct access commodity contracts, energy procurement, and
          energy supply consultation) and energy-related products and services
          (such as energy master planning, energy use consultation and facility

                                       29
<PAGE>
          audits, cogeneration analysis and installation, and project
          management) to commercial, industrial and institutional retail
          customers in the western United States;

     *    SunCor, a developer of residential, commercial, and industrial real
          estate projects in Arizona, New Mexico, and Utah; and

     *    El Dorado, an investment firm.

EARNINGS CONTRIBUTIONS BY SUBSIDIARY AND BUSINESS SEGMENT

     We have two principal business segments (determined by products, services
and the regulatory environment), which consist of our regulated retail
electricity business, regulated traditional wholesale electricity business and
related activities (electric retail segment) and our competitive business
activities (marketing and trading segment). Our electric retail business segment
includes activities related to electricity transmission and distribution, as
well as electricity generation. Our marketing and trading business segment
includes activities related to wholesale marketing and trading and APS Energy
Services' commodity related energy services. The other amounts primarily include
activities related to SunCor and El Dorado. Certain parent company costs, other
than marketing and trading, are included in our electric retail segment.

     The following tables summarize net income and segment details for the
three, nine and twelve months ended September 30, 2002 and the comparable prior
year periods for Pinnacle West and each of our subsidiaries (dollars in
millions):

                                       30
<PAGE>
<TABLE>
<CAPTION>
                                                                      Marketing and
                                  Total          Electric Retail         Trading             Other
THREE MONTHS ENDED           ----------------    ----------------    ---------------    ----------------
SEPTEMBER 30,                 2002      2001      2002      2001      2002     2001      2002      2001
                             ------    ------    ------    ------    ------   ------    ------    ------
<S>                          <C>       <C>       <C>       <C>       <C>      <C>       <C>       <C>
Arizona Public Service (a)   $   87    $  108    $   86    $   87    $    1   $   21    $   --    $   --
Pinnacle West Energy (a)         10        13        10        13        --       --        --        --
APS Energy Services               7        (3)       --        --         7       (3)       --        --
SunCor                           (1)        2        --        --        --       --        (1)        2
El Dorado                       (15)       --        --        --        --       --       (15)       --
Parent company                   13        42        (8)       (1)       16       43         5        --
                             ------    ------    ------    ------    ------   ------    ------    ------
Income before
  accounting change             101       162        88        99        24       61       (11)        2
Cumulative effect of
  change in accounting
  net of income taxes (b)        --       (12)       --       (12)       --       --        --        --
                             ------    ------    ------    ------    ------   ------    ------    ------
Net Income                   $  101    $  150    $   88    $   87    $   24   $   61    $  (11)   $    2
                             ======    ======    ======    ======    ======   ======    ======    ======
</TABLE>

<TABLE>
<CAPTION>
                                                                      Marketing and
                                  Total          Electric Retail         Trading             Other
NINE MONTHS ENDED            ----------------    ----------------    ---------------    ----------------
SEPTEMBER 30,                 2002      2001      2002      2001      2002     2001      2002      2001
                             ------    ------    ------    ------    ------   ------    ------    ------
<S>                          <C>       <C>       <C>       <C>       <C>      <C>       <C>       <C>
Arizona Public Service (a)   $  183    $  242    $  182    $  103    $    1   $  139    $   --    $   --
Pinnacle West Energy (a)         12        14        12        14        --       --        --        --
APS Energy Services              20       (10)       --        --        18      (11)        2         1
SunCor                            9         3        --        --        --       --         9         3
El Dorado                       (18)       --        --        --        --       --       (18)       --
Parent company                   24        42        (9)       (5)       30       47         3        --
                             ------    ------    ------    ------    ------   ------    ------    ------
Income before
  accounting change             230       291       185       112        49      175        (4)        4
Cumulative effect of
  change in accounting
  net of income taxes (b)        --       (15)       --       (15)       --       --        --        --
                             ------    ------    ------    ------    ------   ------    ------    ------
Net Income                   $  230    $  276    $  185    $   97    $   49   $  175    $   (4)   $    4
                             ======    ======    ======    ======    ======   ======    ======    ======

                                                                      Marketing and
                                  Total          Electric Retail         Trading             Other
TWELVE  MONTHS ENDED         ----------------    ----------------    ---------------    ----------------
SEPTEMBER 30,                 2002      2001      2002      2001      2002     2001      2002      2001
                             ------    ------    ------    ------    ------   ------    ------    ------
Arizona Public Service (a)   $  222    $  296    $  218    $  136    $    4   $  160    $   --    $   --
Pinnacle West Energy (a)         15        14        15        14        --       --        --        --
APS Energy Services              21       (19)       --        --        20      (21)        1         2
SunCor                           10         6        --        --        --       --        10         6
El Dorado                       (19)       (5)       --        --        --       --       (19)       (5)
Parent company                   17        42       (11)       (5)       22       48         6        (1)
                             ------    ------    ------    ------    ------   ------    ------    ------
Income before
  accounting change             266       334       222       145        46      187        (2)        2
Cumulative effect of
  change in accounting
  net of income taxes (b)        --       (15)       --       (15)       --       --        --        --
                             ------    ------    ------    ------    ------   ------    ------    ------
Net Income                   $  266    $  319    $  222    $  130    $   46   $  187    $   (2)   $    2
                             ======    ======    ======    ======    ======   ======    ======    ======
</TABLE>

                                       31
<PAGE>
(a)  Consistent with APS' October 2001 ACC filing, in which APS requested
     approval of a purchase power agreement with the Company to ensure ongoing
     reliable service to APS customers in a volatile generation market, during
     2002 APS entered into agreements with its affiliates to buy power. The
     agreements, which expire December 31, 2002, reflect a price based on the
     fully-dispatchable dedication of the Pinnacle West Energy generating assets
     to APS' Native Load customers.

(b)  APS recorded the cumulative effects of a change in accounting for
     derivatives related to the adoption in 2001 of SFAS No. 133, "Accounting
     for Derivative Instruments and Hedging Activities."

EARNINGS VARIANCE EXPLANATIONS

     Throughout these explanations, we refer to "gross margin." With respect to
our electric retail segment and marketing and trading segment, gross margin
refers to electric operating revenues less purchased power and fuel costs. In
June and October 2002, the EITF provided certain guidance related to energy
trading activities in EITF 02-3, "Issues Involved in Accounting for Derivative
Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and
Risk Management Activities" (see Note 8). Beginning in the third quarter of
2002, we have netted all of our energy trading activities on the income
statement and have restated prior period amounts. Real estate gross margin
refers to real estate revenues less real estate operations costs. Other gross
margin refers to other operating revenues less other operating expenses, which
includes El Dorado's investment in NAC, which we began consolidating on our
financial statements in July 2002 (see Note 14). It also includes amounts
related to APS Energy Services' energy consulting services.

     OPERATING RESULTS - THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED
     WITH THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2001

     Our consolidated net income for the three months ended September 30, 2002
was $101 million compared with $150 million for the same period in the prior
year. We recognized a $12 million after-tax loss in the three months ended
September 30, 2001 as a cumulative effect of a change in accounting for
derivatives, as required by SFAS No. 133.

     Our income before accounting change for the three months ended September
30, 2002 was $101 million compared with $162 million for the same period in the
prior year. The period-to-period decrease was primarily the result of lower
earnings contributions from our marketing and trading activities, severance
costs of $25 million pretax recorded in the third quarter of 2002 related to a
voluntary workforce reduction (see Note 17) and losses at El Dorado primarily
related to its investment in NAC in the third quarter of 2002 (see Note 14). The
comparison for marketing and trading activities reflects lower prices in the
wholesale power markets in the western United States. The regulated retail
comparison was negatively impacted by higher costs for purchased power and gas,
weather impacts and the 1.5% electric retail price reduction that took effect
July 1, 2002. These factors were offset by lower replacement costs for power
plant outages, lower operating costs related to generation reliability, customer
growth of 3.1% and higher average usage per customer for the third quarter of
2002.

                                       32
<PAGE>
The major factors that increased (decreased) income before accounting change
were as follows (dollars in millions):

<TABLE>
<CAPTION>
                                                                                 Increase
                                                                                (Decrease)
                                                                                ----------
<S>                                                                             <C>
Marketing and trading segment gross margin:
     Increase in realized marketing and trading in the current period
       primarily due to higher volumes                                          $        3(a)
     Change related to prior period mark-to-market gains on contracts
       delivered during the current period (b)                                          39(a)
     Lower mark-to-market gains for future period deliveries (b)                      (106)
                                                                                ----------
              Net decrease in marketing and trading segment gross margin               (64)
                                                                                ----------

Electric retail segment gross margin:
     Lower replacement power costs for plant outages due to lower market
       prices and fewer unplanned outages                                               15
     Lower hedge management margin, partially offset by lower purchased
       power and fuel costs due to lower spot market prices                            (14)
     Effects of weather on retail sales                                                (10)
     Higher retail sales volumes due to customer growth and higher
       average usage, excluding weather effects                                         22
     Retail price reduction effective July 1, 2002                                      (9)
     Change in mark-to-market for hedged natural gas and purchased
       power costs for future period deliveries (see Note 10)                          (10)
     Miscellaneous factors, net                                                         (6)
                                                                                ----------
              Net decrease in electric retail segment gross margin                     (12)
                                                                                ----------

Total decrease in electric retail and marketing and trading segments'
  gross margins                                                                        (76)
Lower other gross margin primarily related to losses recorded on El Dorado's
  investment in NAC (see Note 14)                                                      (13)
Lower operations and maintenance expense primarily related to lower
  generation reliability costs, partially offset by 2002 severance costs of
  $25 million (see Note 17) and other costs                                              6
Higher other expense                                                                    (7)
Higher net interest expense primarily due to higher debt balances                       (8)
Miscellaneous items, net                                                                (1)
                                                                                ----------
     Decrease in income before income taxes                                            (99)
Lower income taxes primarily due to lower pretax income                                 38
                                                                                ----------
     Decrease in income before accounting change                                $      (61)
                                                                                ==========
</TABLE>

(a)  Net recognized marketing and trading gains (excluding the effects of
     generation sales other than Native Load) increased $42 million.

(b)  Essentially all of our marketing and trading activities are structured
     activities. This means our portfolio of forward sales positions is
     economically hedged with a portfolio of forward purchases that protects the
     economic value of the sales transactions.

                                       33
<PAGE>
MARKETING AND TRADING SEGMENT GROSS MARGIN

     Marketing and trading segment revenues were $54 million lower in the
three-month period ended September 30, 2002, compared with the same period in
the prior year as a result of:

     *    increased revenues from generation sales other than Native Load due to
          higher sales volumes ($4 million);
     *    increased realized revenues from other realized marketing and trading
          in the current period primarily due to higher sales volumes ($10
          million);
     *    change in prior period mark-to-market gains on contracts delivered
          during the current period due to lower unit margins on higher volumes
          being delivered ($40 million increase); and
     *    lower mark-to-market gains for future period deliveries primarily as a
          result of lower market liquidity and lower price volatility, resulting
          in lower volumes ($108 million).

     Marketing and trading segment purchased power and fuel costs were $10
million higher in the three-month period ended September 30, 2002, compared to
the same period in the prior year as a result of:

     *    increased fuel costs related to generation sales other than Native
          Load primarily because of higher sales volumes and higher natural gas
          prices ($4 million);
     *    increased purchased power costs related to other realized marketing
          activities in the current period primarily due to higher sales volumes
          ($7 million); and
     *    other miscellaneous factors ($1 million decrease).

ELECTRIC RETAIL SEGMENT GROSS MARGIN

     Revenues related to our regulated retail and wholesale electricity
businesses were $254 million lower in the three-month period ended September 30,
2002, compared with the same period in the prior year as a result of:

     *    decreased revenues related to wholesale sales for retail load hedge
          management, as a result of lower prices ($265 million);
     *    decreased retail revenues related to milder weather ($15 million);
     *    increased retail revenues related to customer growth and higher
          average usage, excluding weather effects ($33 million);
     *    decreased retail revenues related to a reduction in retail electricity
          prices ($9 million); and
     *    other miscellaneous factors ($2 million net increase).

     Electric retail segment purchased power and fuel costs were $242 million
lower in the three-month period ended September 30, 2002, compared with the same
period in the prior year as a result of:

     *    decreased costs related to lower prices for hedged natural gas and
          purchased power ($251 million);
     *    decreased costs related to the effects of milder weather on retail
          sales ($5 million);

                                       34
<PAGE>
     *    increased costs related to retail sales growth, excluding weather
          effects ($11 million);
     *    change in mark-to-market for hedged natural gas and purchased power
          costs for future period deliveries (see Note 10) ($10 million
          increase);
     *    decreased replacement power costs for power plant outages due to lower
          market prices and fewer unplanned nuclear and coal plant outages ($15
          million); and
     *    other miscellaneous factors ($8 million net increase).

     The decrease in other gross margin of $13 million was primarily due to
losses recorded on El Dorado's investment in NAC (see Note 14).

     The decrease in operations and maintenance expense of $6 million was due to
lower costs related to generation reliability, plant outages and maintenance
costs of $24 million. These factors were partially offset by severance costs of
$25 million related to a 2002 voluntary workforce reduction (see Note 17) and
other costs.

     Other expense increased $7 million primarily due to higher net investment
losses in the current period and higher miscellaneous non-operating costs.

     Interest expense, net of amounts capitalized, increased $8 million
primarily due to higher debt balances.

     OPERATING RESULTS - NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED
     WITH NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001

     Our consolidated net income for the nine months ended September 30, 2002
was $230 million compared with $276 million for the same period in the prior
year. We recognized a $15 million after-tax loss in the nine months ended
September 30, 2001 as a cumulative effect of a change in accounting for
derivatives, as required by SFAS No. 133.

     Our income before accounting change for the nine months ended September 30,
2002 was $230 million compared with $291 million for the same period in 2001.
The period-to-period decrease was the result of lower earnings contributions
from our marketing and trading activities, severance costs of $25 million pretax
recorded in the third quarter of 2002 related to a voluntary workforce reduction
(see Note 17) and losses related to El Dorado's investment in NAC (see Note 14),
partially offset by increased earnings contributions from our regulated retail
electricity and real estate operations. The regulated retail comparison was
favorably impacted by lower replacement costs for power plant outages, customer
growth and higher average usage per customer, lower costs for purchased power
and gas related to lower market prices, and lower generation reliability
expenses, partially offset by the effects of milder weather and retail
electricity price decreases. The real estate results benefited primarily from
more sales activities. The comparison for marketing and trading activities
reflects lower volumes and prices in the wholesale power markets in the western
United States.

                                       35
<PAGE>
The major factors that increased (decreased) income before accounting change
were as follows (dollars in millions):

<TABLE>
<CAPTION>
                                                                                 Increase
                                                                                (Decrease)
                                                                                ----------
<S>                                                                             <C>
Marketing and trading segment gross margin:
     Decrease in generation sales other than Native Load due to lower
       market prices and resulting lower sales volumes                          $      (72)
     Increase in other realized marketing and trading in the current period
       primarily due to higher unit margins on increased volumes                        35(a)
     Change in prior period mark-to-market gains on contracts delivered
       during the current period (b)                                                   (55)(a)
     Lower mark-to-market gains for future period deliveries (b)                      (118)
                                                                                ----------
              Net decrease in marketing and trading segment gross margin              (210)
                                                                                ----------

Electric retail segment gross margin:
     Lower replacement power costs for plant outages due to lower market
       prices and fewer unplanned outages                                              123
     Lower purchased power and fuel costs related to lower prices, net of
       hedge management sales                                                            2
     Effects of weather on retail sales                                                (21)
     Higher retail sales volumes due to 3.1% customer growth and higher
       average usage, excluding weather effects                                         37
     Retail price reductions effective July 1, 2001 and July 1, 2002                   (22)
     Change in mark-to-market for hedged natural gas and purchased
       power costs for future period deliveries (see Note 10)                            5
     Miscellaneous factors, net                                                        (12)
                                                                                ----------
              Net increase in electric retail segment gross margin                     112
                                                                                ----------

Total decrease in electric retail and marketing and trading segments'
  gross margins                                                                        (98)
Higher real estate margin primarily due to increased sales activities                   10
Lower other gross margin primarily related to losses recorded on El Dorado's
  investment in NAC (see Note 14)                                                      (13)
Lower operations and maintenance expense primarily related to lower
  generation reliability costs, partially offset by 2002 severance costs of
  $25 million (see Note 17) and other costs                                             17
Lower depreciation and amortization expense primarily due to lower
  regulatory asset amortization, partially offset by higher depreciation
  on higher plant balances                                                               8
Lower other income                                                                      (9)
Higher other expense                                                                    (7)
Higher net interest expense primarily due to higher debt balances,
  partially offset by lower interest rates                                              (8)
Miscellaneous factors, net                                                               1
                                                                                ----------
     Decrease in income before income taxes                                            (99)
Lower income taxes primarily due to lower pretax income                                 38
                                                                                ----------
     Decrease in income before accounting change                                $      (61)
                                                                                ==========
</TABLE>

                                       36
<PAGE>
(a)  Net recognized marketing and trading gains (excluding the effects of
     generation sales other than Native Load) decreased $20 million.

(b)  Essentially all of our marketing and trading activities are structured
     activities. This means our portfolio of forward sales positions is
     economically hedged with a portfolio of forward purchases that protects the
     economic value of the sales transactions.

MARKETING AND TRADING SEGMENT GROSS MARGIN

     Marketing and trading segment revenues were $421 million lower in the
nine-month period ended September 30, 2002, compared with the same period in the
prior year as a result of:

     *    decreased revenues from generation sales other than Native Load due to
          lower market prices and resulting lower sales volumes ($124 million);
     *    decreased revenues from other realized marketing and trading in the
          current period primarily due to lower prices ($132 million);
     *    change in prior period mark-to-market gains on contracts delivered
          during the current period due to higher volumes being delivered ($47
          million decrease); and
     *    lower mark-to-market gains for future period deliveries primarily as a
          result of lower market liquidity and lower price volatility, resulting
          in lower volumes ($118 million).

     Marketing and trading segment purchased power and fuel costs were $211
million lower in the nine-month period ended September 30, 2002, compared with
the same period in the prior year as a result of:

     *    decreased fuel costs related to generation sales other than Native
          Load primarily because of lower natural gas prices and lower sales
          volumes ($52 million);
     *    decreased purchased power costs related to other realized marketing
          activities in the current period primarily due to lower prices ($167
          million); and
     *    change in prior period mark-to-market fuel costs for current period
          deliveries ($8 million net increase).

ELECTRIC RETAIL SEGMENT GROSS MARGIN

     Revenues related to our regulated retail and wholesale electricity
businesses were $529 million lower in the nine-month period ended September 30,
2002, compared with the same period in the prior year as a result of:

     *    decreased revenues related to traditional wholesale sales as a result
          of lower sales volumes and lower prices ($65 million);
     *    decreased revenues related to wholesale sales for retail load hedge
          management, as a result of lower prices and lower sales volumes ($439
          million);
     *    decreased retail revenues related to milder weather ($50 million);
     *    increased retail revenues related to customer growth and higher
          average usage, excluding weather effects ($68 million);
     *    decreased retail revenues related to reductions in retail electricity
          prices ($22 million); and

                                       37
<PAGE>
     *    other miscellaneous factors ($21 million net decrease).

     Electric retail segment purchased power and fuel costs were $641 million
lower in the nine-month period ended September 30, 2002, compared with the same
period in the prior year as a result of:

     *    decreased costs related to traditional wholesale sales as a result of
          lower sales volumes and lower prices ($65 million);
     *    decreased costs related to lower prices for hedged natural gas and
          purchased power ($441 million);
     *    decreased costs related to the effects of milder weather on retail
          sales ($29 million);
     *    increased costs related to retail sales growth, excluding weather
          effects ($31 million);
     *    change in mark-to-market for hedged natural gas and purchased power
          costs for future period deliveries (see Note 10) ($5 million
          decrease);
     *    decreased replacement power costs for power plant outages due to lower
          market prices and fewer unplanned nuclear and coal plant outages ($123
          million); and
     *    other miscellaneous factors ($9 million net decrease).

     The increase in real estate gross margin of $10 million was primarily due
to increased sales activities.

     The decrease in other gross margin of $13 million was primarily due to
losses recorded on El Dorado's investment in NAC (see Note 14).

     The decrease in operations and maintenance expense of $17 million was
primarily due to lower costs related to generation reliability, plant outages
and maintenance costs of $38 million. Operation and maintenance expense was also
lower as a result of the reversal of $4 million of a $10 million reserve
recorded in the prior period for the California energy situation (see Note 12).
These decreases were partially offset by severance costs of $25 million related
to a 2002 voluntary workforce reduction (see Note 17) and other costs.

     The decrease in depreciation and amortization expense of $8 million
primarily related to lower regulatory asset amortization, in accordance with
APS' 1999 regulatory settlement, partially offset by increased depreciation on
higher plant balances.

     Other income decreased $9 million primarily due to an insurance recovery
recorded in the prior period related to environmental remediation costs.

     Other expense increased $7 million primarily due to losses recorded on El
Dorado's investments in the current period, partially offset by lower
miscellaneous non-operating costs.

     Interest expense increased $8 million primarily due to higher debt
balances, partially offset by lower interest rates.

                                       38
<PAGE>
     OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED
     WITH TWELVE-MONTH PERIOD ENDED SEPTEMBER 30, 2001

     Our consolidated net income for the twelve months ended September 30, 2002
was $266 million compared with $319 million for the same period in the prior
year. We recognized a $15 million after-tax loss in the twelve months ended
September 30, 2001 as a cumulative effect of a change in accounting for
derivatives, as required by SFAS No. 133.

     Our income before accounting change for the twelve months ended September
30, 2002 was $266 million compared with $334 million for the same period a year
earlier. The period-to-period comparison was lower due to lower earnings
contributions from our marketing and trading activities, severance costs of $25
million pretax recorded in the third quarter of 2002 relating to a voluntary
workforce reduction (see Note 17), and losses related to El Dorado's investment
in NAC (see Note 14), partially offset by increased earnings contributions from
our regulated retail electricity and real estate operations. The regulated
retail comparison was favorably impacted by lower replacement costs for power
plant outages, lower costs for purchased power and gas related to lower market
prices, customer growth and higher average usage per customer, partially offset
by the effects of milder weather and retail electricity price decreases. The
real estate results benefited primarily from more sales activities. The
comparison for marketing and trading activities reflects lower volumes and
prices in the wholesale power markets in the western United States.

                                       39
<PAGE>
The major factors that increased (decreased) income before accounting change
were as follows (dollars in millions):

<TABLE>
<CAPTION>
                                                                                 Increase
                                                                                (Decrease)
                                                                                ----------
<S>                                                                             <C>
Marketing and trading segment gross margin:
     Decrease in generation sales other than Native Load due to lower
       market prices and resulting lower sales volumes                          $     (108)
     Increase in other realized marketing and trading in the current period
       primarily due to higher unit margins on increased volumes                        91(a)
     Change in prior period mark-to-market gains on contracts delivered
       during the current period (b)                                                  (114)(a)
     Lower mark-to-market gains for future period deliveries (b)                      (105)
                                                                                ----------
              Net decrease in marketing and trading segment gross margin              (236)
                                                                                ----------

Electric retail segment gross margin:
     Lower replacement power costs for plant outages due to lower market
       prices and fewer unplanned outages                                              148
     Lower hedge management margins, partially offset by lower
       purchased power and fuel costs due to lower market prices                       (12)
     Effects of milder weather on retail sales                                         (21)
     Higher retail sales volumes due to customer growth and higher
       average usage, excluding weather effects                                         39
     Retail price reductions effective July 1, 2001 and July 1, 2002                   (28)
     Change in mark-to-market for hedged natural gas and purchase
       power costs for future period deliveries (see Note 10)                            4
     Miscellaneous factors, net                                                         (7)
                                                                                ----------
              Net increase in electric retail segment gross margin                     123
                                                                                ----------

Total decrease in electric retail and marketing and trading segments'
     gross margins                                                                    (113)
Higher real estate gross margin primarily due to increased sales activities             12
Lower other gross margin primarily related to losses recorded on El Dorado's
     investment in NAC (see Note 14)                                                   (13)
Lower operations and maintenance expense primarily related to lower
     generation reliability costs, partially offset by 2002 severance costs
     of $25 million (see Note 17) and other costs                                       15
Lower depreciation and amortization primarily due to lower regulatory asset
     amortization, partially offset by increased depreciation and
     amortization on higher property, plant and equipment balances                       5
Lower other income                                                                      (5)
Higher net interest expense primarily due to higher debt balances, partially
     offset by higher capitalized interest and lower interest rates                     (7)
Miscellaneous factors, net                                                              (2)
                                                                                ----------
     Decrease in income before income taxes                                           (108)
Lower income taxes primarily due to lower income                                        40
                                                                                ----------
     Decrease in income before accounting change                                $      (68)
                                                                                ==========
</TABLE>

                                       40
<PAGE>
(a)  Net marketing and trading gains (excluding the effects of generation sales
     other than Native Load) recognized for the current period decreased $23
     million.

(b)  Essentially all of our marketing and trading activities are structured
     activities. This means our portfolio of forward sales positions is
     economically hedged with a portfolio of forward purchases that protects the
     economic value of the sales transactions.

MARKETING AND TRADING SEGMENT GROSS MARGIN

     Marketing and trading segment revenues were $586 million lower in the
twelve-month period ended September 30, 2002, compared to the same period in the
prior year as a result of:

     *    decreased revenues from generation sales other than Native Load due to
          lower market prices and resulting lower sales volumes ($198 million);
     *    decreased revenues from other realized marketing and trading in the
          current period primarily due to lower prices ($176 million);
     *    change in prior period mark-to-market gains on contracts delivered
          during the current period due to higher volumes being delivered ($107
          million decrease); and
     *    lower mark-to-market gains for future period deliveries primarily as a
          result of lower market liquidity and lower price volatility, resulting
          in lower volumes ($105 million).

     Marketing and trading segment purchased power and fuel costs were $350
million lower in the twelve-month period ended September 30, 2002, compared to
the same period in the prior year as a result of:

     *    decreased fuel costs related to generation sales other than Native
          Load primarily because of lower sales volumes and lower natural gas
          prices ($90 million);
     *    decreased purchased power costs related to other realized marketing
          activities in the current period primarily due to lower prices ($267
          million); and
     *    change in prior period mark-to-market fuel costs for current period
          deliveries ($7 million increase).

ELECTRIC RETAIL SEGMENT GROSS MARGIN

     Revenues related to our regulated retail and wholesale electricity
businesses were $548 million lower in the twelve-month period ended September
30, 2002, compared to the same period in the prior year as a result of:

     *    decreased revenues related to traditional wholesale sales as a result
          of lower sales volumes and lower prices ($79 million);
     *    decreased revenues related to retail load hedge management wholesale
          sales, as a result of lower sales volumes and lower prices ($458
          million);
     *    decreased retail revenues related to milder weather ($50 million);
     *    increased retail revenues related to customer growth and higher
          average usage, excluding weather effects ($82 million);
     *    decreased retail revenues related to reductions in retail electricity
          prices ($28 million); and

                                       41
<PAGE>
     *    other miscellaneous factors ($15 million net decrease).

     Electric retail segment purchased power and fuel costs were $671 million
lower in the twelve-month period ended September 30, 2002, compared with the
same period in the prior year as a result of:

     *    decreased costs related to traditional wholesale sales as a result of
          lower sales volumes and lower prices ($79 million);
     *    decreased costs related to lower prices for hedged natural gas and
          purchased power prices ($446 million);
     *    decreased costs related to the effects of milder weather on retail
          sales ($29 million);
     *    increased costs related to retail sales growth, excluding weather
          effects ($43 million);
     *    change in mark-to-market for hedged natural gas and purchased power
          costs for future period deliveries (see Note 10) ($4 million
          decrease);
     *    decreased replacement power costs for power plant outages due to lower
          market prices and fewer unplanned outages ($148 million); and
     *    miscellaneous factors ($8 million net decrease).

     The increase in real estate gross margin of $12 million was primarily due
to increased sales activities.

     The decrease in other gross margin of $13 million was primarily due to
losses on El Dorado's investment in NAC (see Note 14).

     The decrease in operations and maintenance expense of $15 million was
primarily due to lower costs related to generation reliability, plant outages
and maintenance costs of $37 million. Operations and maintenance expense was
also lower as a result of the reversal of $4 million of a $10 million reserve
recorded in the prior period for the California energy situation (see Note 12),
partially offset by severance costs of $25 million related to a 2002 voluntary
workforce reduction (see Note 17) and other costs.

     The decrease in depreciation and amortization expenses of $5 million
primarily related to lower regulatory asset amortization, in accordance with
APS' 1999 regulatory settlement, partially offset by increased depreciation and
amortization on higher property, plant and equipment balances.

     Other income decreased $5 million primarily due to an insurance recovery
recorded in the prior period related to environmental remediation costs and
other costs.

     Net interest expense increased $7 million primarily because of higher debt
balances related to our generation expansion program, partially offset by the
increase in capitalized interest on our generation expansion program and lower
interest rates.

                                       42
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

     CAPITAL EXPENDITURE REQUIREMENTS

     The following table summarizes the actual capital expenditures for the nine
months ended September 30, 2002 and estimated capital expenditures for the next
three years (dollars in millions):

                                 Nine Months
                                    Ended                 Estimated
                                 September 30,   ----------------------------
                                     2002         2002       2003       2004
                                    ------       ------     ------     ------
APS
  Delivery                          $  270       $  347     $  270     $  267
  Existing generation (a)              106          149        116         89
                                    ------       ------     ------     ------
Subtotal                               376          496        386        356
                                    ------       ------     ------     ------
Pinnacle West Energy (b)               306          411        257        109(e)
SunCor(c)                               55           79         48         52
Other(d)                                22           38         22         21
                                    ------       ------     ------     ------
Total                               $  759       $1,024     $  713     $  538
                                    ======       ======     ======     ======

(a)  This table assumes that APS and Pinnacle West Energy generation assets
     remain separated, consistent with the ACC's Track A Order (see Note 5).
(b)  See further discussion of Pinnacle West Energy's generation expansion
     program in "Capital Resources and Cash Requirements - Pinnacle West Energy"
     below.
(c)  Consists primarily of capital expenditures for land development and retail
     and office building construction and is included in the "Increase in real
     estate investments" in the condensed consolidated statements of cash flows.
(d)  Primarily the parent company and APS Energy Services.
(e)  This amount does not include an expected reimbursement by SNWA of
     approximately $100 million of these costs in 2004 in exchange for SNWA's
     option to purchase a 25% interest in the Silverhawk project at that time.

     Delivery capital expenditures are comprised of T&D infrastructure additions
and upgrades, capital replacements, new customer construction, and related
information systems and facility costs. Examples of the types of projects
included in the forecast include T&D lines and substations, line extensions to
new residential and commercial developments, and upgrades to customer
information systems. In addition, APS began several major transmission projects
in 2001. These projects are periodic in nature and are driven by strong regional
customer growth. APS expects to spend about $150 million on major transmission
projects during the 2002 to 2004 time frame.

                                       43
<PAGE>
     Existing generation capital expenditures are comprised of multiple
improvements for our existing fossil and nuclear plants and the replacement of
steam generators. 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. The existing
generation also contains nuclear fuel expenditures of approximately $30 million
annually in 2002, 2003, and 2004.

     Several years ago APS and the other Palo Verde participants decided to
replace Palo Verde Unit 2 steam generators, which replacement is presently
scheduled to be completed in the fall of 2003. APS and the other Palo Verde
participants are currently considering issues related to replacement of the
steam generators in Units 1 and 3. Although a final determination of whether
Units 1 and 3 will require steam generator replacement to operate over their
current full licensed lives has not yet been made, APS and the other
participants have approved fabrication of one set of spare steam generators.
APS' portion of this expenditure is approximately $27 million, which will be
spent from 2002 to 2005. Existing generation in the capital expenditure table
above includes $21 million of the costs in 2002 through 2004. If the Palo Verde
participants decide to proceed with steam generator replacement at both Units 1
and 3, APS has estimated that its portion of the fabrication and installation
costs and associated power uprate modifications would be approximately $130
million over the next seven years, which would be funded with
internally-generated cash or external financings.

     CAPITAL RESOURCES AND CASH REQUIREMENTS

          CONTRACTUAL COMMITMENTS

     The following table summarizes actual contractual cash commitments for the
nine months ended September 30, 2002 and estimated contractual commitments for
the next five years and thereafter (dollars in millions):

<TABLE>
<CAPTION>
                                                                   Estimated
                                   Nine       -----------------------------------------------------
                                  Months                    Years Ended December 31,
                                  Ended       -----------------------------------------------------
                               September 30,                                                 There-
                                   2002        2002     2003     2004     2005     2006      after
                                  ------      ------   ------   ------   ------   ------     ------
<S>                               <C>         <C>      <C>      <C>      <C>      <C>        <C>
Long-term debt payments
  APS                             $  247      $  247   $   --   $  205   $  400   $   84     $1,518
  Pinnacle West                       --           1      276      216       --      300         --
  SunCor                              11          11      117       --       --        3         16
                                  ------      ------   ------   ------   ------   ------     ------
Total long-term debt payments        258         259      393      421      400      387      1,534
Operating leases payments             47          68       66       65       64       63        550
Fuel and purchase power
  commitments                        258         338      134       82       65       68        170
                                  ------      ------   ------   ------   ------   ------     ------
Total cash commitments (a)           563      $  665   $  593   $  568   $  529   $  518     $2,254
                                  ======      ======   ======   ======   ======   ======     ======
</TABLE>

(a)  Total cash commitments are approximately $5.1 billion. The total net
     present value of these cash commitments is approximately $3.0 billion.

                                       44
<PAGE>
          CONTINGENT COMMITMENTS

     We have issued parental guarantees and obtained surety bonds on behalf of
our unregulated subsidiaries. The credit support instruments enable Pinnacle
West Energy to continue its generation expansion plan (primarily equipment and
performance guarantees), enable APS Energy Services to provide commodity energy
and energy-related products and enable El Dorado to support the activities of
NAC. The amounts as of September 30, 2002 are listed as follows (dollars in
millions):

                                                  Guarantees        Surety Bonds
                                                  ----------        ------------
Pinnacle West Energy                                 $ 250             $  --
APS Energy Services                                     72                39
El Dorado                                               43                --

     In addition, as of September 30, 2002, SunCor had outstanding guarantees of
approximately $29 million on behalf of affiliated joint ventures.

          CREDIT RATINGS

     The ratings of securities of Pinnacle West and APS as of the date of this
report are shown below and reflect the respective views of the rating agencies,
from whom 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 or that they will not be revised or withdrawn entirely by the rating
agencies, if, in their respective judgments, circumstances so warrant. Any
downward revision or withdrawal may adversely effect the market price of
Pinnacle West's or APS' securities and serve to increase those companies' cost
of capital, and access to capital.

                                          Moody's    Standard & Poor's    Fitch
                                          -------    -----------------    -----
PINNACLE WEST
  Senior Unsecured                         Baa2            BBB-            BBB
  Commercial Paper                          P-2            A-2             F-2

APS
  Senior Secured                            A3             A-              A-
  Senior Unsecured                         Baa1            BBB             BBB+
  Secured Lease
    Obligation Bonds                       Baa2            BBB             BBB
  Commercial Paper                          P-2            A-2             F-2

     On November 4, 2002 Standard & Poor's affirmed the APS debt ratings in the
above chart, but lowered Pinnacle West's senior unsecured debt rating from BBB
to BBB- "because of the structural subordination of this debt as compared to the
unsecured debt at APS." On that same date, Standard & Poor's lowered APS'
corporate credit rating from BBB+ to BBB and affirmed the BBB corporate credit
rating of Pinnacle West. All of Pinnacle West's and APS' credit ratings remain
investment grade. Standard & Poor's assigned a stable outlook to the ratings.

                                       45
<PAGE>
          DEBT PROVISIONS

     Pinnacle West's and APS' significant debt covenants related to their
respective financing arrangements include a debt- to-total-capitalization ratio
and an interest coverage test. Pinnacle West and APS are in compliance with such
covenants and each anticipates that it will continue to meet all the significant
covenant requirement levels. Failure to comply with such covenant levels would
result in an event of default which, generally speaking, would require the
immediate repayment of the debt subject to the covenants.

     Neither Pinnacle West's nor APS' financing agreements contain "ratings
triggers" that would result in an acceleration of the required interest and
principal payments in the event of a ratings downgrade. However, in the event of
a ratings downgrade, Pinnacle West and/or APS may be subject to increased
interest costs under certain financing agreements. We are unable to quantify the
effects, if any, that Standard & Poor's lowering of Pinnacle West's senior
unsecured debt rating may have on Pinnacle West's borrowing costs in 2002
through 2004 or whether the lower rating will affect the timing or nature of the
Company's capital requirements.

     All of Pinnacle West's bank agreements contain "cross-default" provisions
under which a default by it or APS in a specified amount under another agreement
would result in a default and the potential acceleration of payment under the
agreements. All of APS' bank agreements contain cross-default provisions under
which a default by APS in a specified amount under another agreement would
result in a default and the potential acceleration of payment under the
agreements. Pinnacle West's and APS' credit agreements generally contain
provisions under which the lenders could refuse to advance loans in the event of
a material adverse change in the borrower's business or financial condition.

          PINNACLE WEST (PARENT COMPANY)

     Our primary cash needs are for dividends to our shareholders; equity
infusions into our subsidiaries, primarily Pinnacle West Energy; interest
payments; and optional and mandatory repayments of principal on our long-term
debt (see the table above for the Company's contractual cash commitments,
including our debt repayment obligations). On October 23, 2002, the Company's
board of directors increased the common stock dividend to an indicated annual
rate of $1.70 per share from $1.60 per share, effective with the December 1,
2002 dividend payment. The Company currently intends to continue growing the
common dividends in the future; such 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, our marketing and
trading operations, external financings, and cash distributions from our other
subsidiaries, primarily SunCor. For the years 1999 through 2001, total dividends
from APS were $510 million. For the nine months ended September 30, 2002,
dividends from APS were approximately $128 million. We expect SunCor to make
cash distributions to the Company of $80 million to $100 million annually in
2003 through 2005 due to anticipated accelerated asset sales activity.

                                       46
<PAGE>
     On February 8, 2002, we issued $215 million of 4.5% Notes due 2004. On July
31, 2002, we completed a $300 million bank credit facility. The borrowings are
LIBOR-based and can be drawn upon as needed, and are expected to be used
primarily to fund Pinnacle West Energy capital requirements. The facility
matures on July 30, 2003. The majority of these borrowings were used to fund
Pinnacle West Energy capital expenditures.

     The Company has financed Pinnacle West Energy's generation expansion
program premised upon Pinnacle West Energy's receipt of APS' generation assets
by the end of 2002. As discussed in Note 5, on September 16, 2002, APS filed a
Financing Application requesting the ACC to allow APS to borrow up to $500
million and to lend the proceeds to Pinnacle West Energy or to the Company; to
guarantee up to $500 million of Pinnacle West Energy's debt or of the Company's
debt; or a combination of both, not to exceed $500 million in the aggregate. In
the Financing Application, APS stated that the ACC's reversal of the generation
asset transfer requirement and the resulting bifurcation of generation assets
between APS and Pinnacle West Energy under different regulatory regimes results
in Pinnacle West Energy being unable to attain investment-grade credit ratings.
This, in turn, precludes Pinnacle West Energy from accessing capital markets to
refinance the bridge financing provided by the Company to fund the construction
of Pinnacle West Energy generation assets or from effectively competing in the
wholesale markets. APS noted that Pinnacle West Energy had previously received
investment-grade credit ratings contingent upon its receipt of APS generation
assets, and that the Company's credit ratings could be adversely affected if
Pinnacle West Energy is unable to finance its capital requirements. On November
4, 2002, Standard & Poor's lowered the Company's senior unsecured debt rating
from BBB to BBB-. See "Credit Ratings" above. On November 8, 2002, APS filed
an Interim Financing Application with the ACC requesting the ACC to permit APS
to (a) make short-term advances to Pinnacle West in the form of an
inter-affiliate line of credit in the amount of $125 million or (b) guarantee
$125 million of Pinnacle West's short-term debt. See "ACC Applications" in Note
5.

     The parent company's outstanding debt was approximately $1.1 billion at
September 30, 2002. At September 30, 2002, we had credit commitments from
various banks totaling $250 million, which were available to support the
issuance of commercial paper or to be used as bank borrowings. At September 30,
2002, we had about $206 million of commercial paper outstanding and $35 million
of short-term borrowings. In addition, as noted above, we had an additional $300
million of borrowing capacity under a credit facility with various banks, under
which $45 million had been borrowed as of September 30, 2002.

     In mid-2003, the Company will need to refinance approximately $550 million
of parent company indebtedness, including a total of $300 million we expect to
borrow under the credit facility referenced in the preceding paragraph. If the
ACC does not grant the approvals requested in

                                       47
<PAGE>
the Financing Application in a timely fashion, the Company would anticipate
taking the following steps, to the extent necessary in priority order, although
the timing of the Company's liquidity needs may affect the order of the steps
taken:

     *    The reduction of capital expenditures through plant delay and
          cancellation;

     *    The sale of non-core assets; and

     *    The issuance of new debt and, if appropriate, new equity.

     Although we believe it would be inappropriate to discuss specific amounts
for each of the foregoing categories, we estimate the sum of these steps to
approximate the current outstanding debt at the Company, which, as noted above,
totaled approximately $1.1 billion as of September 30, 2002. We believe, even in
this scenario, if the parent company's near-term debt maturities were paid in
full, that the Company's common stock dividend would remain intact.

     As part of a multi-employer pension plan sponsored by Pinnacle West, we
contribute at least the minimum amount required under Internal Revenue Service
regulations but no more than the maximum tax-deductible amount. The minimum
required funding takes into consideration the value of the fund assets and our
pension obligation. We have voluntarily contributed cash to our pension plan in
each of the last four years; our minimum required contributions during each of
those years was zero. Specifically, we contributed $24 million for 2001, $44
million for 2000, $25 million for 1999 and $14 million for 1998. We again plan
to voluntarily contribute $27 million in 2002. APS and other subsidiaries fund
their share of the pension contribution, of which APS represents approximately
90% of the total funding amounts described above. The assets in the plan are
mostly domestic common stocks, bonds and real estate. We currently forecast a
pension contribution in 2003 of approximately $50-$80 million, all or part of
which may be required depending on 2002 fund performance. If the fund
performance continues to decline as a result of a continued decline in equity
markets, we may be required to make contributions in future years.

     As a result of change in IRS guidance, we claimed a tax deduction related
to an APS tax accounting method change on the 2001 Federal consolidated income
tax return. The accelerated deduction has resulted in a $200 million reduction
in current tax liability.

          APS

     APS' capital requirements consist primarily of capital expenditures and
optional and mandatory redemptions of long-term debt. On September 16, 2002, APS
filed a Financing Application with the ACC requesting the ACC to allow APS to
borrow up to $500 million and to lend the proceeds to Pinnacle West Energy or to
the Company; to guarantee up to $500 million of Pinnacle West Energy's or the
Company's debt; or a combination of both, not to exceed $500 million in the
aggregate. On November 8, 2002, APS filed an Interim Financing Application with
the ACC requesting the ACC to permit APS to (a) make short-term advances to
Pinnacle West in the form of an inter-affiliate line of credit in the amount of
$125 million or (b) guarantee $125 million of Pinnacle West's short-term debt.
See "ACC Applications" in Note 5 for a discussion of the Financing Application
and the Interim Financing Application. See the table above for APS' cash
commitments, including its debt repayment obligations; that table does not take
into account any funds that APS may lend to Pinnacle West Energy, or the Company
consistent with the Interim Financing Application or the Financing Application.

                                       48
<PAGE>
     APS pays for its capital requirements with cash from operations and, to the
extent necessary, external financings. APS pays for its dividends to Pinnacle
West with cash from operations.

     On March 1, 2002, APS issued $375 million of 6.5% Notes due 2012.

     On November 1, 2002, Maricopa County, Arizona Pollution Control Corporation
issued $90 million of 5.05% Pollution Control Revenue Refunding Bonds (Arizona
Public Service Company Palo Verde Project) 2002 Series A, due 2029 and loaned
the proceeds to APS pursuant to a loan agreement. The bonds were issued to
refinance $90 million of outstanding pollution control bonds.

     On March 15, 2002, APS redeemed at maturity $125 million of its First
Mortgage Bonds, 8.125% Series due 2002. On April 15, 2002, APS redeemed $122
million of its First Mortgage Bonds, 8.75% Series due 2024. See the cash
commitments table above for APS' debt repayments. Based on market conditions and
optional call provisions, APS may make optional redemptions of long-term debt
from time to time.

     At September 30, 2002, APS had credit commitments from various banks
totaling about $250 million, which were available either to support the issuance
of commercial paper or to be used as bank borrowings. At September 30, 2002, APS
had about $25 million of commercial paper outstanding and no bank borrowings.

     Although provisions in APS' first mortgage bond indenture, articles of
incorporation, and ACC financing orders establish maximum amounts of additional
first mortgage bonds, debt and preferred stock that APS may issue, APS does not
expect any of these provisions to limit its ability to meet its capital
requirements.

          PINNACLE WEST ENERGY

     Pinnacle West Energy has completed or announced plans to build about 3,420
MW of natural gas-fired generating capacity from 2001 through 2007 at an
estimated cost of about $1.9 billion. This does not reflect an expected
reimbursement in 2004 by SNWA of approximately $100 million of Pinnacle West
Energy's cumulative capital expenditures in the Silverhawk project in exchange
for SNWA's option to purchase a 25% interest in the project. Our expansion plan
will be sized to meet cash flow and market conditions. Pinnacle West Energy is
currently funding its capital requirements through capital infusions from
Pinnacle West, which finances those infusions through debt financings and
internally-generated cash. See the capital expenditures table above for actual
capital expenditures through September 30, 2002 and projected capital
expenditures for the next three years.

     As discussed under "ACC Applications" in Note 5, APS has filed a Financing
Application with the ACC requesting the ACC to allow APS to borrow up to $500
million and to lend the proceeds to Pinnacle West Energy or the Company; to
guarantee up to $500 million of Pinnacle West Energy's or the Company's debt; or
a combination of both, not to exceed $500 million in the aggregate. In the
Financing Application, APS stated that the ACC's reversal of the generation

                                       49
<PAGE>
asset transfer requirement and the resulting bifurcation of generation assets
between APS and Pinnacle West Energy under different regulatory regimes results
in Pinnacle West Energy being unable to attain investment grade credit ratings.
This, in turn, precludes Pinnacle West Energy from accessing capital markets to
refinance the bridge financing provided by the Company to fund the construction
of Pinnacle West Energy generation assets or from effectively competing in the
wholesale markets. On November 8, 2002, APS filed an Interim Financing
Application with the ACC requesting the ACC to permit APS to (a) make short-term
advances to Pinnacle West in the form of an inter-affiliate line of credit in
the amount of $125 million or (b) guarantee $125 million of Pinnacle West's
short-term debt.

     Pinnacle West Energy has completed or is currently planning the following
natural gas-fired plants and other projects:

     *    A 650 MW combined cycle expansion of the West Phoenix Power Plant in
          Phoenix. The 120 MW West Phoenix Unit 4 began commercial operation in
          June 2001. Construction has begun on the 530 MW West Phoenix Unit 5,
          with commercial operation expected to begin in mid-2003.

     *    The Redhawk Power Plant Units 1 and 2 are each 530 MW combined cycle
          units, near Palo Verde. Commercial operations began in July 2002 for
          Units 1 and 2. The Company is evaluating whether to construct Redhawk
          Units 3 and 4. Pinnacle West Energy has procured four gas turbines for
          Redhawk Units 3 and 4. The cancellation cost for these turbines would
          be approximately $50 million until September 2003.

     *    The construction of an 80 MW simple cycle power plant at Saguaro in
          Southern Arizona. Commercial operation began in July 2002.

     *    Development of the 570 MW Silverhawk combined cycle plant 20 miles
          north of Las Vegas, Nevada. Construction of the plant began in August
          2002, with an expected commercial operation date in mid-2004. As noted
          above, Pinnacle West Energy has signed an agreement with Las
          Vegas-based SNWA under which SNWA has an option to purchase a 25%
          interest in the project.

     *    A Pinnacle West Energy affiliate is exploring the possibility of
          creating an underground natural gas storage facility on Company-owned
          land west of Phoenix. A feasibility study is in progress to determine
          if the proposed acreage can support a natural gas storage cavern.

          OTHER SUBSIDIARIES

     During the past three years, SunCor funded its cash requirements with cash
from operations and its own external financings. SunCor's capital needs consist
primarily of capital expenditures for land development and retail and office
building construction. See the capital expenditures table above for actual
capital expenditures in the nine months ended September 30, 2002 and projected
capital expenditures for the next three years. SunCor expects to fund its

                                       50
<PAGE>
capital requirements with cash from operations and external financings. SunCor's
long-term indebtedness decreased $11 million in the nine months ended September
30, 2002. SunCor has provided guarantees of approximately $29 million on behalf
of affiliated joint ventures.

     We expect SunCor to make cash distributions to the parent company of $80
million to $100 million annually in 2003 through 2005 due to anticipated
accelerated asset sales activity.

     El Dorado funded its cash requirements during the past three years with
cash from operations and with cash infused by the parent company, primarily for
NAC in 2002. El Dorado expects minimal capital requirements over the next three
years. El Dorado intends to focus on prudently realizing the value of its
existing investments. El Dorado's future investments are expected to be related
to the energy sector. El Dorado's long-term indebtedness increased $9 million
during the nine months ended September 30, 2002, due to its consolidation of NAC
for financial reporting purposes.

     APS Energy Services' cash requirements during the past three years were
funded with cash infusions from the parent company. APS Energy Services' capital
expenditures and other cash requirements are increasingly funded by operations,
with some funding from cash infused by Pinnacle West. See the capital
expenditures table above regarding APS Energy Services' capital expenditures.

     See "Business Outlook" below for information about the expected earnings
contributions of SunCor, El Dorado and APS Energy Services.

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 determination
of the appropriate accounting for our derivative instruments, mark-to-market
accounting (see Note 8) and the impacts of regulatory accounting (see Note 19)
on our consolidated financial statements. See Note 1 in the 2001 10-K.

BUSINESS OUTLOOK

     COMPETITION AND ELECTRIC INDUSTRY RESTRUCTURING

     See "Business Outlook - Competition and Industry Restructuring" in Item 7
of the 2001 10-K and Note 5 above for a discussion of developments affecting
retail and wholesale electric competition.

                                       51
<PAGE>
     GENERATION EXPANSION

     See "Capital Resources and Cash Requirements - Pinnacle West Energy" above
for information regarding our generation expansion plans. The planned additional
generation is expected to increase revenues, fuel expenses, operating expenses,
and financing costs.

     FACTORS AFFECTING OPERATING REVENUES

     Electric operating revenues are derived from sales of electricity in
regulated retail markets in Arizona, and from competitive retail and wholesale
bulk power markets in the western United States. These revenues are expected to
be affected by electricity sales volumes related to customer mix, customer
growth and average usage per customer, as well as electricity prices and
variations in weather from period to period.

     Customer growth in APS' service territory averaged about 4% a year for the
three years 1999 through 2001; we currently expect customer growth to be about
3.1% in 2002 and between 3.5% and 4.0% a year in 2003 and 2004. We currently
estimate that retail electricity sales in kilowatt-hours will grow 3.5% to 5.5%
a year in 2002 through 2004, before the retail effects of weather variations.
The customer growth and sales growth referred to in this paragraph apply to
energy delivery customers. As industry restructuring evolves in the regulated
market area, we cannot predict the number of APS' standard-offer customers that
will switch to unbundled service, although recent regulatory developments and
legal challenges to the Rules have raised considerable uncertainty about the
status and pace of retail electric competition in Arizona (see Note 5). As
previously noted, under the 1999 Settlement Agreement, we agreed to retail
electricity price reductions of 1.5% annually through July 1, 2003 (see Note 5).

     Competitive sales of energy and energy-related products and services are
made by APSES in western states that have opened to competitive supply.

     OTHER FACTORS AFFECTING FUTURE FINANCIAL RESULTS

     Purchased power and fuel costs are impacted by our electricity sales
volumes, existing contracts for generation fuel and purchased power, our power
plant performance, prevailing market prices, new generating plants being placed
in service and our hedging program for managing such costs.

     Operations and maintenance expenses are expected to be affected by sales
mix and volumes, power plant operations, inflation, outages, higher trending
pension and other post-retirement costs and other factors. We implemented a
voluntary workforce reduction program announced in July 2002. We recorded $25
million before taxes in voluntary severance costs in the third quarter of 2002.
We expect to record up to $12 million before taxes for additional severance
costs in the fourth quarter of 2002 (See Note 17). In addition, we are expecting
to produce annual operating expense savings of approximately $30 million
beginning in 2003.

     Depreciation and amortization expenses are expected to be affected by net
additions to existing utility plant and other property, changes in regulatory
asset amortization and our generation expansion program. As noted above, West
Phoenix Unit 4 was placed in service in June 2001, Redhawk Units 1 and 2 and the
new Saguaro unit began commercial operations in July 2002, West Phoenix Unit 5
is expected to be on line in mid-2003 and Silverhawk is expected to be in

                                       52
<PAGE>
service in mid-2004. The regulatory assets to be recovered under the 1999
Settlement Agreement are currently being amortized as follows (dollars in
millions):

                                                      1/1 - 6/30
     1999      2000      2001      2002      2003        2004        Total
     ----      ----      ----      ----      ----        ----        -----
     $164      $158      $145      $115      $ 86        $ 18         $686

     Taxes other than income taxes consist primarily of property taxes, which
are affected by tax rates and the value of property in-service and under
construction. The average property tax rate for APS, which currently owns the
majority of our property, was 9.32% of assessed value for 2001 and 9.16% for
2000. We expect property taxes to increase primarily due to our generation
expansion program and our additions to existing facilities.

     Interest expense is affected by the amount of debt outstanding and the
interest rates on that debt. The primary factors affecting borrowing levels in
the next several years are expected to be our generation expansion program and
our internally-generated cash flow. Capitalized interest offsets a portion of
interest expense while capital projects are under construction. We stop
recording capitalized interest on a project when it is placed in commercial
operation. As noted above, we have placed new power plants in commercial
operation in 2001 and 2002 and we expect to bring additional plants on-line in
2003 and 2004. We are continuing to evaluate our generation expansion program.

     If we decide not to construct Redhawk Units 3 and 4, we would expect to
record a pretax charge of approximately $50 million related to the cancellation
of gas turbine contracts.

     The regulatory developments and legal challenges to the Rules discussed in
Note 5 have raised considerable uncertainty about the status and pace of
electric competition in Arizona. Although some very limited retail competition
existed in APS' service area in 1999 and 2000, there are currently no active
retail competitors offering unbundled energy or other utility services to APS'
customers. As a result, we cannot predict when, and the extent to which,
additional competitors will re-enter APS' service territory. As competition in
the electric industry continues to evolve, we will continue to evaluate
strategies and alternatives that will position us to compete effectively in a
restructured industry.

     In the case of SunCor, we are undertaking an aggresive effort to accelerate
asset sales activities to approximately double SunCor's annual earnings in the
2003-2005 period compared to the approximate $20 million in earnings expected
for 2002.

     The annual earnings contribution from APS Energy Services is expected to be
positive over the next several years due primarily to a number of retail
electricity contracts in California. APS Energy Services' pretax losses were $10
million in 2001 and $13 million in 2000.

     El Dorado's historical results are not necessarily indicative of future
performance for El Dorado. El Dorado's strategies focus on prudently realizing
the value of its existing investments. Any future investments are expected to be
related to the energy sector.

     Our financial results may be affected by the application of SFAS No. 133.
See Note 10 for further information.

     On October 25, 2002, the EITF voted to rescind EITF 98-10 (see Note 8). We
are evaluating the current effect of the rescission on our financial results.

     On November 4, 2002, Standard & Poor's lowered the Company's senior
unsecured debt rating from BBB to BBB-. See "Credit Ratings" above. We are
unable to quantify the effects, if any, that Standard & Poor's lowering of

                                       53
<PAGE>
Pinnacle West's senior unsecured debt rating may have on Pinnacle West's
borrowing costs or whether the lower rating will affect the timing or nature of
the Company's capital requirements.

     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.

     The Company's current 2002 adjusted debt to total capitalization ratio,
adjusted as per rating agency methodology to include debt and equity related to
Palo Verde SPE's (see Note 9), is approximately 60%. The Company expects to
decrease the adjusted debt to total capitalization ratio to approximately 55%
over the next several years.

RATE MATTERS

     See Note 5 for a discussion of a price reduction effective as of July 1,
2002, and for a discussion of the 1999 Settlement Agreement that will, among
other things, result in five annual price reductions over a four-year period
ending July 1, 2003.

RISK FACTORS

     Exhibit 99.3, which is hereby incorporated by reference, contains a
discussion of risk factors involving the Company.

FORWARD-LOOKING STATEMENTS

     The above discussion contains forward-looking statements based on current
expectations and we assume no obligation to update these statements or to make
any further statements on any of these issues, except as required by applicable
laws. 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 us. These factors include
the ongoing restructuring of the electric industry, including the introduction
of retail electric competition in Arizona; the outcome of regulatory and
legislative proceedings relating to the restructuring; state and federal
regulatory and legislative decisions and actions, including the price mitigation
plan adopted by the FERC; regional economic and market conditions, including the
California energy situation and completion of generation construction in the
region, which could affect customer growth and the cost of power supplies; the
cost of debt and equity capital; weather variations affecting local and regional
customer energy usage; conservation programs; power plant performance; the
successful completion of our generation expansion program; regulatory issues
associated with generation expansion, such as permitting and licensing; our
ability to compete successfully outside traditional regulated markets (including
the wholesale market); technological developments in the electric industry; the
performance of the stock market, which affects the amount of our required
contributions to our pension plan; and the strength of the real estate market in
SunCor's market areas, which include Arizona, New Mexico and Utah.

     These factors and the other matters discussed above may cause future
results to differ materially from historical results or from results or outcomes
we currently expect or seek.

                                       54
<PAGE>
ITEM 3. 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.

     We are exposed to the impact of market fluctuations in the price and
transportation costs of electricity, natural gas, coal, and emissions
allowances. We employ established procedures to manage risks associated with
these market fluctuations by utilizing various commodity derivatives, including
exchange-traded futures and options and over-the-counter forwards, options, and
swaps. As part of our overall risk management program, we enter into derivative
transactions 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 commodity.

     In addition, subject to specified risk parameters established by the Board
of Directors and monitored by our ERMC, we engage in trading activities intended
to profit from market price movements. In accordance with EITF 98-10,
"Accounting For Contracts Involved in Energy Trading and Risk Management
Activities," such trading positions are marked-to-market. These trading
activities are part of our marketing and trading activities and are reflected in
the marketing and trading segment revenues and expenses. See Note 8 for a
discussion of the EITF's decision to rescind EITF 98-10.

     The following schedule shows the changes in mark-to-market on our trading
positions during the three, nine and twelve months ended September 30, 2002
(dollars in millions):

                                      Periods Ended September 30, 2002
                                 ------------------------------------------
                                 Three Months   Nine Months   Twelve Months
                                    Ended          Ended          Ended
                                 ------------   -----------   -------------
     Mark-to-market of net
       trading positions at
       beginning of period          $  133         $  138         $  198
     Prior period mark-to-
       market (gains) losses
       realized during the
       period                            3            (34)           (96)
     Change in mark-to-
       market gains for
       future period
       deliveries                       23             55             57
     Change in valuation
       techniques                       --             --             --
                                    ------         ------         ------
     Mark-to-market of net
       trading positions at
       end of period                $  159         $  159         $  159
                                    ======         ======         ======

     Net gains at inception were approximately zero for the three months ended
September 30, 2002. Net gains at inceptions were approximately $10 million for

                                       55
<PAGE>
the nine months ended September 30, 2002 and $11 million for the twelve months
ended September 30, 2002, these amounts included a reasonable marketing margin.
See Note 10 for mark-to-market on system hedges and for disclosure of risk
management activities recorded on the condensed consolidated balance sheets.

     The table below shows the maturities of our trading positions as of
September 30, 2002, by the type of valuation that is performed to calculate the
fair value of the contract (dollars in millions):

<TABLE>
<CAPTION>
                                                                           Years    Total
                                                                           there-    fair
SOURCE OF FAIR VALUE        2002      2003      2004      2005     2006    after    value
                           ------    ------    ------    ------   ------   ------   ------
<S>                        <C>       <C>       <C>       <C>      <C>      <C>      <C>
Prices actively quoted     $   (7)   $    8    $    5    $    6   $    3   $    9   $   24
Prices provided by other
  external sources             (1)       (3)       (8)        4        5       --       (3)
Prices based on models
  and other valuation
  methods                      20        26        38        20       18       16      138
                           ------    ------    ------    ------   ------   ------   ------
Total by maturity          $   12    $   31    $   35    $   30   $   26   $   25   $  159
                           ======    ======    ======    ======   ======   ======   ======
</TABLE>

     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 the condensed consolidated balance sheets at September
30, 2002 (dollars in millions):

                                                     September 30, 2002
                                                  -------------------------
                                                         Gain(Loss)
                                                  -------------------------
                                                  Price Up       Price Down
     Commodity                                       10%             10%
     ---------                                    --------       ----------
     Trading (a):
       Electricity                                 $   (1)         $    2
       Natural gas                                     (1)              1
       Other                                            1              --
     System (b):
       Natural gas
         hedges                                        17             (15)
                                                   ------          ------
     Total                                         $   16          $  (12)
                                                   ======          ======

(a)  Essentially all of our marketing and trading activities are structured
     activities. This means our portfolio of forward sales positions is hedged
     with a portfolio of forward purchases that protects the economic value of
     the sales transactions.

(b)  These contracts are hedges of our forecasted purchases of natural gas. 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.

                                       56
<PAGE>
     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 47% of our $260 million of risk management and trading
assets as of September 30, 2002. We use a risk management process to assess and
monitor the financial exposure of this and all other counterparties. Despite the
fact that the great majority of our trading counterparties are rated as
investment grade by the credit rating agencies, including the counterparty noted
above, there is still a possibility that one or more of these companies could
default, resulting in a material impact on consolidated earnings for a given
period. Counterparties in the portfolio consist principally of major energy
companies, municipalities 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. In many contracts, we employ collateral requirements and
standardized agreements that allow for the netting of positive and negative
exposures associated with a single counterparty. Valuation adjustments are
established representing our estimated credit losses on our overall exposure to
counterparties.

     Changing interest rates will affect interest paid on variable-rate debt and
interest earned by our pension and nuclear decommissioning trust funds. Our
policy is to manage interest rates through the use of a combination of
fixed-rate and floating-rate debt. The pension and nuclear decommissioning trust
funds also have risks associated with changing market values of equity
investments. Pension and nuclear decommissioning costs are recovered in
regulated electricity prices.

ITEM 4. CONTROLS AND PROCEDURES

     As of a date within 90 days of the date of this report (the "Evaluation
Date"), we carried out an evaluation, under the supervision and with the
participation of our management, including our President and Chief Executive
Officer and our Vice President, Finance, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon this evaluation, our President and Chief Executive Officer and
our Vice President, Finance, concluded that, as of the Evaluation Date, our
disclosure controls and procedures were adequate to ensure that information
required to be disclosed by us in the reports filed or submitted by us under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.

     There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation, including any corrective actions with regard to significant
deficiencies and internal weaknesses.

                                       57
<PAGE>
                           PART II - OTHER INFORMATION

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.

     COMPETITION AND ELECTRIC INDUSTRY RESTRUCTURING

     See Note 5 of Notes to Condensed Consolidated Financial Statements in Part
I, Item 1 of this report for a discussion of regulatory developments regarding
the introduction of retail electric competition in Arizona and related matters.

     REGIONAL TRANSMISSION ORGANIZATIONS

     As previously reported, on October 16, 2001, APS and other owners of
electric transmission lines in the Southwest filed with the FERC a request for a
declaratory order confirming that their proposal to form WestConnect RTO, LLC
would satisfy the FERC's requirements for the formation of a regional
transmission organization ("RTO"). See "Regulation and Competition - Wholesale -
Regional Transmission Organizations" in Part I, Item 1 of the 2001 10-K. On
October 10, 2002, the FERC issued an order finding that the WestConnect
proposal, if modified to address specified issues, could meet the FERC's RTO
requirements and provide the basic framework for a standard market design for
the Southwest. In its order, the FERC also stated that its approval of various
WestConnect provisions addressed in the order would not be overturned or
affected by the final rule the FERC intends to ultimately adopt in response to
its July 31, 2002 Notice of Proposed Rulemaking regarding a standard market
design for the electric utility industry (see "Federal" in Note 5 for additional
information regarding the Notice of Proposed Rulemaking). FERC did not address
all of the proposed WestConnect provisions in its order and some could still be
affected by a final rule in the pending rulemaking proceeding. We cannot
currently predict what, if any, impact there may be to the WestConnect proposal
or to us if the FERC adopts the proposed SMD rule. On November 12, 2002, APS and
other owners filed a request for rehearing and clarification on portions of the
October 10 order.

     NATURAL GAS SUPPLY

     As previously reported on May 31, 2002, the FERC issued an order requiring
the conversion of all Full Requirements contracts to Contract Demand contracts.
See "Natural Gas Supply in Part II, Item 5 of the June 10-Q. On September 20,
2002, the FERC issued another order clarifying the capacity allocation
methodology, extending the conversion implementation date from November 1, 2002
to May 1, 2003 and approving reallocation of costs for service. APS and other
Full Requirement contract holders have sought rehearings of the FERC orders. We
currently do not expect this to have a material adverse impact on our financial
position, results of operations or liquidity.

                                       58
<PAGE>
     COAL SUPPLY

     Because covenants under the Four Corners lease and related federal
rights-of-way and grants expired in July 2001, the Navajo Nation assessed taxes
on the coal supplier and the plant. See "Coal Supply" in Part II, Item 5 of the
June 2002 10-Q. In July 2002, APS and the Navajo Nation negotiated a settlement
agreement relating to the plant pursuant to which APS will make settlement
payments to the Navajo Nation and that settlement agreement was executed in
August 2002. Pursuant to the terms of the settlement agreement, APS does not
expect the payments to have a material adverse impact on its financial position,
results of operations or liquidity.

                                       59
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

          Exhibit No.    Description
          -----------    -----------

           3.1           Pinnacle West Bylaws, amended as of September 18, 2002

           3.2           APS Bylaws, amended as of September 18, 2002

          10.1           Employment Agreement effective as of October 1, 2002
                         between APS and James M. Levine

          12.1           Ratio of Earnings to Fixed Charges

          99.1           Certification of William J. Post, the Registrant's
                         principal executive officer, pursuant to Section 906 of
                         the Sarbanes-Oxley Act of 2002

          99.2           Certification of Michael V. Palmeri, the Registrant's
                         principal financial officer, pursuant to Section 906 of
                         the Sarbanes-Oxley Act of 2002

          99.3           Pinnacle West Risk Factors

     In addition, the Company hereby incorporates the following Exhibits
pursuant to Exchange Act Rule 12b-32 and Regulation ss.229.10(d) by reference to
the filings set forth below:

<TABLE>
<CAPTION>
                                            Originally Filed                      Date
Exhibit No.   Description                      as Exhibit:        File No.(a)   Effective
-----------   -----------                 --------------------    -----------   ---------
<S>           <C>                         <C>                       <C>         <C>
3.1           Articles of Incorporation   19.1 to the Company's     1-8962      11-14-88
              restated as of July 29,     September 30, 1988
              1988                        Form 10-Q Report
</TABLE>

     (b)  Reports on Form 8-K

     During the quarter ended September 30, 2002, and the period from October 1
through November 14, 2002, we filed the following reports on Form 8-K:

     Report dated June 30, 2002 regarding exhibits comprised of financial
information and earnings variance explanations.

----------
(a)  Reports filed under File No. 1-8962 were filed in the office of the
     Securities and Exchange Commission located in Washington, D.C.

                                       60
<PAGE>
     Report dated July 11, 2002 regarding a letter APS filed with the ACC.

     Report dated July 23, 2002 regarding an ACC Administrative Law Judge's
recommendation on Track A issues.

     Report dated August 13, 2002 filing certifications of the Company's
principal executive officer and principal financial officer.

     Report dated August 27, 2002 regarding the ACC's decision on Track A
issues.

     Report dated September 10, 2002 regarding the ACC's Track A Order and APS'
filing of the Financing Application.

     Report dated September 30, 2002 regarding exhibits comprised of financial
information and earnings variance explanations.

     Report dated October 17, 2002 regarding the Company's earnings outlook and
a slide presentation for use at an analyst conference.

                                       61
<PAGE>
                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                        PINNACLE WEST CAPITAL CORPORATION
                                        (Registrant)


Dated: November 14, 2002                By: Michael V. Palmeri
                                            ------------------------------------
                                            Michael V. Palmeri
                                            Vice President, Finance
                                            (Principal Financial Officer
                                            and Officer Duly Authorized
                                            to sign this Report)


                  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

CERTIFICATIONS

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 quarterly 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 quarterly
report;

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

4.   The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)   designed such disclosure controls and procedures 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 quarterly report is being prepared;

b)   evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

                                       62
<PAGE>
c)   presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a)   all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b)   any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: November 14, 2002.


                                        William J. Post
                                        ----------------------------------------
                                        William J. Post
                                        Title: Chairman of the Board and Chief
                                               Executive Officer


                  CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

CERTIFICATIONS

I, Michael V. Palmeri, certify that:

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

2.   Based on my knowledge, this quarterly 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 quarterly
report;

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

4.   The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)   designed such disclosure controls and procedures 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 quarterly report is being prepared;

b)   evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

                                       63
<PAGE>
c)   presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

a)   all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b)   any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6.   The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: November 14, 2002.


                                        Michael V. Palmeri
                                        ----------------------------------------
                                        Michael V. Palmeri
                                        Title: Vice President, Finance

                                       64

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.1
<SEQUENCE>3
<FILENAME>ex3-1.txt
<DESCRIPTION>BYLAWS OF PINNACLE WEST CAPITAL CORPORATION
<TEXT>
                                                                     EXHIBIT 3.1

                                     BYLAWS

                                       OF

                        PINNACLE WEST CAPITAL CORPORATION
                       (AMENDED AS OF SEPTEMBER 18, 2002)

                            I. REFERENCES; SENIORITY

     1.01. REFERENCES.  Any reference herein made to law will be deemed to refer
to the law of the  State of  Arizona,  including  any  applicable  provision  or
provisions of Chapters 1-17 and Chapter 23 of Title 10, Arizona Revised Statutes
(or its successor), as at any given time in effect. Any reference herein made to
the Articles will be deemed to refer to the  applicable  provision or provisions
of the Articles of Incorporation of the Company,  and all amendments thereto, as
at any  given  time  on file  with  the  Arizona  Corporation  Commission  (this
reference  to that  Commission  being  intended to include any  successor to the
incorporating  and related  functions  being performed by that Commission at the
date of the initial adoption of these Bylaws).

     1.02. SENIORITY. Except as indicated in Part X of these Bylaws, the law and
the Articles (in that order of  precedence)  will in all respects be  considered
senior and superior to these Bylaws,  with any  inconsistency  to be resolved in
favor of the law and the Articles (in that order of precedence),  and with these
Bylaws to be deemed  automatically  amended from time to time to  eliminate  any
such inconsistency which may then exist.

     1.03.  SHAREHOLDERS  OF RECORD.  Except as  otherwise  required  by law and
subject to any procedure  established by the Company pursuant to Arizona Revised
Statutes  Section  10-723  (or any  comparable  successor  provision),  the word
"SHAREHOLDER"  as used herein shall mean one who is a holder of record of shares
in the Company.

                            II. SHAREHOLDERS MEETINGS

     2.01. ANNUAL MEETINGS.  An annual meeting of shareholders shall be held for
the election of directors at such date, time and place, either within or without
the  State of  Arizona,  as may be  designated  by  resolution  of the  Board of
Directors from time to time. Any other proper  business may be transacted at the
annual  meeting.  A special  meeting may be called and held in lieu of an annual
meeting  pursuant  to the  provisions  of  Section  2.02  below,  and  the  same
proceedings (including the election of directors) may be conducted thereat as at
a regular  meeting.  Any  director  elected  at any annual  meeting,  or special
meeting in lieu of an annual meeting, will continue in office until the election
of his or her successor,  subject to his or her (a) earlier resignation pursuant
to Section 6.01 below,  (b) removal pursuant to Section 3.13 below, or (c) death
or disqualification.

     2.02.  SPECIAL  MEETINGS.  Except as  otherwise  required  by law,  special
meetings of the  shareholders  may be held  whenever and wherever  called by the
Chairman of the Board,  the President,  or a majority of the Board of Directors,
but such  special  meetings  may not be called by any other  person or  persons.
Business  transacted at any special meeting of shareholders  shall be limited to
the purposes stated in the notice.
<PAGE>
     2.03.  NOTICE.  Notice of any meeting of the shareholders  will be given as
provided by law to each  shareholder  entitled to vote at such  meeting  and, if
required by law, to each other  shareholder of the Company.  Any such notice may
be waived as provided by law.

     2.04.  RIGHT TO VOTE.  For each meeting of the  shareholders,  the Board of
Directors  will fix in advance a record  date as  contemplated  by law,  and the
shares of stock and the shareholders  "ENTITLED TO VOTE" (as that or any similar
term is herein used) at any meeting of the shareholders will be determined as of
the applicable record date. The Secretary (or in his or her absence an Assistant
Secretary)  will see to the making and production of any record of  shareholders
entitled to vote or otherwise  entitled to notice of shareholders  meetings,  in
either case which is required by law.  Any voting  entitlement  may be exercised
through  proxy,  or in such other  manner as  specifically  provided  by law, in
accordance  with the  applicable  law.  In the event of  contest,  the burden of
proving  the  validity of any  undated or  irrevocable  proxy will rest with the
person  seeking to  exercise  the same.  A  telegram,  cablegram,  or  facsimile
appearing  to have  been  transmitted  by a  shareholder  (or by his or her duly
authorized attorney-in-fact) or other means of voting by telephone or electronic
transmission  may be accepted as a  sufficiently  written and executed  proxy if
otherwise permitted by law.

     2.05. NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS.

          (a)  Annual Meetings of  Shareholders.  (1) Nominations of persons for
               election  to the  Board  of  Directors  of the  Company  and  the
               proposal of business to be considered by the  shareholders may be
               made at an annual  meeting of  shareholders  only (i) pursuant to
               the Company's notice of meeting (or any supplement thereto), (ii)
               by or at the  direction of the Board of Directors or (iii) by any
               shareholder  of the Company who was a shareholder at the time the
               respective  notice provided for in this Section 2.05 is delivered
               to the  Secretary of the Company,  who is entitled to vote at the
               meeting and who complies with the notice  procedures set forth in
               this Section 2.05.

               (2)  For  nominations  or other  business to be properly  brought
               before an annual  meeting  by a  shareholder  pursuant  to clause
               (iii) of paragraph  (a)(1) of this Section 2.05, the  shareholder
               must have given timely notice thereof in writing to the Secretary
               of the  Company  and any such  proposed  business  other than the
               nominations  of persons for  election  to the Board of  Directors
               must  constitute a proper matter for  shareholder  action.  To be
               timely, a shareholder  notice shall be delivered to the Secretary
               at the principal  executive offices of the Company not later than
               the close of business  (a) with respect to business to be brought
               before the meeting,  on the ninetieth day or not earlier than the
               close of business on the one hundred  twentieth  day prior to the
               first   anniversary  of  the  preceding   year's  annual  meeting
               (provided, however, that in the event that the date of the annual
               meeting  has been  changed  by more  than  thirty  days from such
               anniversary  date, notice by the shareholder must be so delivered
               not later than the close of business  on the tenth day  following
               the day on which public  announcement of the date of such meeting
               was  mailed  or public disclosure of the annual meeting was made,

                                       -2-
<PAGE>
               whichever  first occurs),  and (b) with respect to nominations of
               persons to be elected to the Board of Directors,  the one-hundred
               and  eightieth  day prior to the date of the meeting at which the
               election is to occur.  In no event shall the public  announcement
               of an adjournment or postponement of an annual meeting commence a
               new time  period (or extend any time  period) for the giving of a
               shareholder's  notice  as  described  above.  Such  shareholder's
               notice  shall  set  forth:   (a)  as  to  each  person  whom  the
               shareholder proposes to nominate for election as a director,  all
               information  relating  to  such  person  that is  required  to be
               disclosed in  solicitations  of proxies for election of directors
               in an election contest,  or is otherwise  required,  in each case
               pursuant to Regulation 14A under the  Securities  Exchange Act of
               1934, as amended (the "EXCHANGE ACT"), and Rule 14a-11 thereunder
               (and such  person's  written  consent to being named in the proxy
               statement  as a nominee and to serving as a director if elected);
               (b) as to any other  business  that the  shareholder  proposes to
               bring before the  meeting,  a brief  description  of the business
               desired  to be  brought  before  the  meeting,  the  text  of the
               proposal  or  business  (including  the  text of any  resolutions
               proposed for  consideration  and, in the event that such business
               includes  a  proposal  to amend the  Bylaws of the  Company,  the
               language for the proposed amendment),  the reasons for conducting
               such business at the meeting,  and any material  interest in such
               business of such shareholder and the beneficial owner, if any, on
               whose behalf the proposal is made; and (c) as to the  shareholder
               giving the  notice and the  beneficial  owner,  if any,  on whose
               behalf  the  nomination  or  proposal  is made,  (i) the name and
               address  of such  shareholder,  as they  appear on the  Company's
               books, and of such beneficial owner, (ii) the class and number of
               shares  of  capital   stock  of  the   Company   that  are  owned
               beneficially   and  of  record  by  such   shareholder  and  such
               beneficial owner, (iii) a representation  that the shareholder is
               a holder of record of stock of the  Company  entitled  to vote at
               such  meeting  and intends to appear in person or by proxy at the
               meeting  to  propose  such  business  or  nomination,  and (iv) a
               representation  whether the shareholder or the beneficial  owner,
               if any, intends or is part of a group that intends (a) to deliver
               a proxy statement and/or form of proxy to holders of at least the
               percentage of the Company's outstanding capital stock required to
               approve or adopt the  proposal  or elect the  nominee  and/or (b)
               otherwise to solicit proxies from shareholders in support of such
               proposal or  nomination.  The  Company  may require any  proposed
               nominee to furnish such other  information  as it may  reasonably
               require to determine the eligibility of such proposed  nominee to
               serve as a director of the Company.

          (b)  Special  Meetings of  Shareholders.  Only such business  shall be
               conducted at a special meeting of shareholders as shall have been
               brought  before the meeting  pursuant to the Company's  notice of
               meeting.

                                       -3-
<PAGE>
          (c)  General.  (1) Only such persons who are  nominated in  accordance
               with the  procedures  set  forth in this  Section  2.05  shall be
               eligible  to be  elected  at an  annual  or  special  meeting  of
               shareholders  of the Company to serve as directors  and only such
               business shall be conducted at a meeting of shareholders as shall
               have been  brought  before  the  meeting in  accordance  with the
               procedures  set forth in this Section  2.05.  Except as otherwise
               provided by law, the Chairman of the meeting shall have the power
               and duty (a) to determine  whether a  nomination  or any business
               proposed to be brought  before the meeting was made or  proposed,
               as the case may be, in accordance  with the  procedures set forth
               in this  Section  2.05  (including  whether  the  shareholder  or
               beneficial  owner,  if any,  on whose  behalf the  nomination  or
               proposal is made solicited (or is part of a group that solicited)
               or did not so solicit,  as the case may be, proxies in support of
               such  shareholder's  nominee or proposal in compliance  with such
               shareholder's  representation as required by clause (a)(2)(c)(iv)
               of this  Section  2.05)  and (b) if any  proposed  nomination  or
               business was not made or proposed in compliance with this Section
               2.05, to declare that such  nomination  shall be  disregarded  or
               that such proposed business shall not be transacted.

               (2)  For purposes of this  Section  2.05,  "PUBLIC  ANNOUNCEMENT"
               shall mean  disclosure  in a press  release  reported  by the Dow
               Jones News Service,  Associated Press or comparable national news
               service or in a document  publicly  filed by the Company with the
               Securities and Exchange  Commission pursuant to Section 13, 14 or
               15(d) of the Exchange Act.

               (3)  Notwithstanding  the  foregoing  provisions  of this Section
               2.05,  a  shareholder  shall  also  comply  with  all  applicable
               requirements  of the Exchange  Act and the rules and  regulations
               thereunder  with respect to the matters set forth in this Section
               2.05.  Nothing in this Section 2.05 shall be deemed to affect any
               rights (a) of shareholders  to request  inclusion of proposals in
               the  Company's  proxy  statement  pursuant  to Rule  14a-8 of the
               Exchange  Act or (b) of the  holders of any  series of  Preferred
               Stock to elect directors pursuant to any applicable provisions of
               the Articles.

     2.06. RIGHT TO ATTEND.  Except only to the extent of persons  designated by
the Board of  Directors  or the Chairman of the meeting to assist in the conduct
of the  meeting (as  referred to in Sections  2.08 and 2.09 below) and except as
otherwise  permitted  by the Board or such  Chairman,  the  persons  entitled to
attend any meeting of shareholders may be confined to (i) shareholders  entitled
to vote  thereat  and other  shareholders  entitled to notice of the meeting and
(ii) the persons upon whom  proxies  valid for purposes of the meeting have been
conferred or their duly appointed  substitutes  (if the related proxies confer a
power of substitution);  provided,  however,  that the Board of Directors or the
Chairman of the  meeting  may  establish  rules  limiting  the number of persons
referred  to in  clause  (ii) as being  entitled  to  attend  on  behalf  of any
shareholder so as to preclude such an excessively  large  representation of such
shareholder  at the meeting as, in the  judgment of the Board or such  Chairman,
would be unfair to other  shareholders  represented  at the meeting or be unduly
disruptive  of the orderly  conduct of business at such  meeting  (whether  such

                                       -4-
<PAGE>
representation would result from fragmentation of the aggregate number of shares
held by such shareholder for the purpose of conferring proxies,  from the naming
of an excessively  large proxy delegation by such shareholder or from employment
of any other  device).  A person  otherwise  entitled to attend any such meeting
will cease to be so entitled if, in the judgment of the Chairman of the meeting,
such person engages thereat in disorderly conduct impeding the proper conduct of
the meeting in the interests of all shareholders as a group.

     2.07.  QUORUM.  Except as otherwise  provided by law, the Articles or these
Bylaws,  at each meeting of  shareholders  the presence in person or by proxy of
the holders of a majority  in voting  power of the  outstanding  shares of stock
entitled to vote at the meeting shall be necessary and  sufficient to constitute
a quorum.

     2.08.  ELECTION  INSPECTORS.  The Board of  Directors,  in  advance  of any
shareholders  meeting may appoint an election  inspector or inspectors to act at
such  meeting  (and  any  adjournment  thereof).  If an  election  inspector  or
inspectors  are not so  appointed,  the Chairman of the meeting may or, upon the
request  of  any  person  entitled  to  vote  at the  meeting  will,  make  such
appointment.  If any person appointed as an inspector fails to appear or to act,
a substitute may be appointed by the Chairman of the meeting. If appointed,  the
election  inspector or inspectors (acting through a majority of them if there be
more  than  one)  will   determine  the  number  of  shares   outstanding,   the
authenticity,  validity  and  effect of  proxies,  the  credentials  of  persons
purporting to be  shareholders  or persons named or referred to in proxies,  and
the number of shares  represented  at the  meeting in person and by proxy;  they
will  receive and count  votes,  ballots and  consents  and announce the results
thereof; they will hear and determine all challenges and questions pertaining to
proxies and  voting;  and, in  general,  they will  perform  such acts as may be
proper  to  conduct   elections  and  voting  with  complete   fairness  to  all
shareholders. No such election inspector need be a shareholder of the Company.

     2.09.  ORGANIZATION AND CONDUCT OF MEETINGS. Each shareholders meeting will
be called to order and thereafter  chaired by the Chairman of the Board if there
then is one;  or,  if not,  or if the  Chairman  of the  Board is  absent  or so
requests,  then by the  President;  or if both the Chairman of the Board and the
President  are  unavailable,  then by such other  officer of the Company or such
shareholder as may be appointed by the Board of Directors.  The Secretary (or in
his or her absence an Assistant  Secretary) of the Company will act as secretary
of  each  shareholders  meeting;  if  neither  the  Secretary  nor an  Assistant
Secretary is in  attendance,  the Chairman of the meeting may appoint any person
(whether a  shareholder  or not) to act as secretary  thereat.  After  calling a
meeting to order,  the  Chairman  thereof may require  the  registration  of all
shareholders  intending to vote in person,  and the filing of all proxies,  with
the election inspector or inspectors, if one or more have been appointed (or, if
not,  with the  secretary of the  meeting).  After the  announced  time for such
filing of proxies has ended,  no further  proxies or changes,  substitutions  or
revocations  of proxies will be  accepted.  If  directors  are to be elected,  a
tabulation of the proxies so filed will, if any person  entitled to vote in such
election so requests, be announced at the meeting (or adjournment thereof) prior
to the closing of the election polls.

     Absent a showing of bad faith on his or her part, the Chairman of a meeting
will,  among other  things,  have  absolute  authority to determine the order of
business to be conducted at such meeting and to establish rules for, and appoint

                                       -5-
<PAGE>
personnel to assist in,  preserving  the orderly  conduct of the business of the
meeting  (including  any informal,  or question and answer,  portions  thereof).
Rules,  regulations  or  procedures  regarding  the conduct of the business of a
meeting, whether adopted by the Board of Directors or prescribed by the Chairman
of the  meeting,  may  include,  without  limitation,  the  following:  (i)  the
establishment of an agenda or order of business for the meeting;  (ii) rules and
procedures for maintaining order at the meeting and the safety of those present;
(iii)   limitations  on  attendance  at  or  participation  in  the  meeting  to
shareholders  of record of the Company,  their duly  authorized and  constituted
proxies  (subject to Section  2.06) or such other persons as the Chairman of the
meeting shall  determine;  (iv)  restrictions  on entry to the meeting after the
time  fixed  for the  commencement  thereof;  and (v)  limitations  on the  time
allotted to  questions  or comments  by  participants.  Unless and to the extent
determined by the Board of Directors or the Chairman of the meeting, meetings of
shareholders  shall not be required to be held in  accordance  with the rules of
parliamentary   procedure.  Any  informational  or  other  informal  session  of
shareholders conducted under the auspices of the Company after the conclusion of
or otherwise in conjunction with any formal business meeting of the shareholders
will be chaired by the same  person  who  chairs  the  formal  meeting,  and the
foregoing  authority  on his or her part  will  extend  to the  conduct  of such
informal session.

     2.10.  VOTING.  The number of shares  voted on any matter  submitted to the
shareholders  which is required to constitute  their action  thereon or approval
thereof will be determined in accordance with applicable law, the Articles,  and
these Bylaws, if applicable.  No ballot or change of vote will be accepted after
the polls have been declared  closed  following the ending of the announced time
for voting.

     2.11.  SHAREHOLDER  APPROVAL OR  RATIFICATION.  The Board of Directors  may
submit any contract or act for approval or ratification at any duly  constituted
meeting of the shareholders,  the notice of which either includes mention of the
proposed  submittal  or is waived as provided in Section  2.03 above.  Except as
otherwise  required by law (e.g.,  Arizona Revised Statutes Section 10-863),  if
any  contract or act so  submitted  is approved or ratified by a majority of the
votes cast thereon at such  meeting,  the same will be valid and as binding upon
the Company and all of its  shareholders as it would be if approved and ratified
by each and every shareholder of the Company.

     2.12.  CONTROL  SHARE ACT. The  provisions of Section  10-2721  through and
including Section 10-2727 of the Arizona Revised Statutes shall not apply to the
Company.

     2.13.  ADJOURNMENTS.  Any meeting of shareholders,  annual or special,  may
adjourn  from time to time to  reconvene  at the same or some other  place,  and
notice  need not be given of any such  adjourned  meeting  if the time and place
thereof are announced at the meeting at which the  adjournment is taken.  At the
adjourned  meeting the Company may transact  any  business  that might have been
transacted  at the original  meeting.  If the  adjournment  is for more than one
hundred and twenty days, or if after the  adjournment a new record date is fixed
for the adjourned  meeting,  notice of the  adjourned  meeting shall be given to
each shareholder of record entitled to vote at the meeting.

                                       -6-
<PAGE>
                             III. BOARD OF DIRECTORS

     3.01.  MEMBERSHIP.  The Board of Directors of the corporation shall consist
of not less then  nine (9) nor more than  twenty-one  (21)  shareholders  of the
Company  or of any parent  corporation  thereof  (except  that it shall not be a
requirement  that any member of the initial  Board of Directors be a shareholder
of the Company or of any parent corporation thereof),  and shall be divided into
three classes in the manner  provided in the Articles  (Art.  Fifth).  The Board
will have the  exclusive  power to  increase  or  decrease  its size within such
limits.  Any  vacancy  occurring  in the  Board,  whether  by  reason  of death,
resignation,  disqualification  or otherwise,  may be filled by the directors as
contemplated  by law and as  provided in the  Articles  (Art.  Fifth).  Any such
increase  in the size of the  Board,  and the  filling  of any  vacancy  created
thereby,  will require action by a majority of the whole membership of the Board
as comprised immediately before such increase.

     3.02.  QUALIFICATIONS.  In order to qualify as a director, a person must be
the owner of one or more  shares of the  capital  stock of the Company or of any
parent  corporation  thereof  at the  time of  assuming  office  (except  as may
otherwise  be  provided  in these  Bylaws  or in the  Articles)  and for so long
thereafter as such person remains in office. A person will cease to qualify as a
director if he or she (i) is in good faith determined by a majority of the other
directors  then in office to be  physically  or mentally  incapable of competent
performance  as a  director  for  a  period,  starting  with  inception  of  the
incapacity, that has extended or is likely to extend for more than six months or
(ii) has  failed to attend  six  successive  regular  meetings  of the Board (as
determined in accordance  with Section 3.03 below) unless and to the extent such
failure is waived by a majority of the other directors then in office;  however,
disqualification  pursuant  to  clause  (i) or (ii) of this  sentence  will  not
preclude the subsequent  election or appointment of such person as a director by
the  shareholders  or the  Board  if a  majority  of  the  directors  in  office
immediately  prior to the  submission of such person for election or appointment
shall determine that his or her prior  incapacity or principal  reason for prior
non-attendance  no longer  exists.  A person will not  qualify  for  election or
appointment as a director,  whether  initially or on re-election  and whether by
the  shareholders  at their  annual  meeting  or by the  Board of  Directors  as
contemplated  in Section 3.01 above, if such person's 70th birthday occurs on or
has occurred  before the date of such election,  appointment or  re-election.  A
person who has been a full-time  employee of the Company  within  twelve  months
prior to the date of any election will not qualify for election as a director on
that date unless he or she then  remains a full-time  employee of the Company or
unless the Board of  Directors  specifically  authorizes  the  election  of such
person  (but it is not  intended  that  any  such  authorization  will  extend a
person's service on the Board beyond the age limitation set out in the preceding
sentence). A person who has qualified by age or employment status for his or her
most recent election as a director may serve  throughout the term for which such
person was elected,  notwithstanding  the occurrence of his or her 70th birthday
or  cessation of full-time  employment  by the Company  between the date of such
election and the end of such term,  subject,  however,  to his or her  otherwise
remaining qualified for such office.

     3.03. REGULAR MEETINGS.  A regular annual meeting of the directors is to be
held as soon as practicable  after the  adjournment of each annual  shareholders
meeting either at the place of the  shareholders  meeting or at such other place
as the directors  elected at the shareholders  meeting may have been informed of
at or before the time of their election. Regular meetings, other than the annual

                                       -7-
<PAGE>
ones,  may be held at such  intervals  at such  places  and at such times as the
Board of Directors may provide.

     3.04.  SPECIAL MEETINGS.  Special meetings of the Board of Directors may be
held  whenever  and  wherever  called  for by the  Chairman  of the  Board,  the
President  or the number of  directors  which would be required to  constitute a
quorum.

     3.05.  NOTICE.  No notice need be given of regular meetings of the Board of
Directors.  Notice of the time and place (but not necessarily the purpose or all
of the purposes) of any special meeting will be given to each director in person
or  by  telephone,  or  via  mail,  telegram,  facsimile,  or  other  electronic
transmission addressed in the manner appearing on the Company's records.  Notice
to any director of any such special meeting will be deemed given sufficiently in
advance when (i) if given by mail,  the same is  deposited in the United  States
mail at least four days before the meeting date, with postage  thereon  prepaid,
(ii) if given by telegram,  the same is delivered  to the  telegraph  office for
fast transmittal at least 48 hours prior to the convening of the meeting,  (iii)
if given by facsimile or other electronic transmission,  the same is received by
the  director or an adult  member of his or her office  staff or  household,  at
least 24 hours prior to the  convening  of the  meeting,  or (iv) if  personally
delivered or given by telephone, the same is handed, or the substance thereof is
communicated  over the telephone to the director or to an adult member of his or
her office staff or  household,  at least 24 hours prior to the convening of the
meeting.  Any such notice may be waived as provided by law. No call or notice of
a meeting of  directors  will be  necessary  if each of them  waives the same in
writing or by attendance.  Any meeting,  once properly called and noticed (or as
to which call and notice have been waived as aforesaid) and at which a quorum is
formed,  may be  adjourned  to another  time and place by a majority of those in
attendance.

     3.06.  QUORUM;  VOTING.  A quorum for the  transaction  of  business at any
meeting or  adjourned  meeting of the  directors  will  consist of a majority of
those then in office. Any matter submitted to a meeting of the directors will be
resolved by a majority of the votes cast thereon,  except as otherwise  required
by these Bylaws  (ss.ss.  3.01 and 3.02 above and ss. 3.07 below),  by law or by
any applicable  Article.  However, in case of an equality of votes, the Chairman
of the meeting will have a second or deciding  vote.  Where action by a majority
of the whole  membership is required,  such requirement will be deemed to relate
to a majority  of the  directors  in office at the time the action is taken.  In
computing any such majority, whether for purposes of determining the presence of
a quorum  or the  adequacy  of the vote on any  proposed  action,  any  unfilled
vacancies at the time  existing in the  membership of the Board will be excluded
from the computation.

     3.07.  EXECUTIVE  COMMITTEE.  The Board of  Directors  may,  by  resolution
adopted by a majority of the whole  Board,  name three or more of its members as
an Executive Committee.  Such Executive Committee will have and may exercise the
powers of the Board of Directors in the  management  of the business and affairs
of the Company  while the Board is not in session,  except only as  precluded by
law or where  action  other than by a majority  of the votes cast is required by
these Bylaws, or the law (all as referred to in Section 3.06 above), and subject
to such limitations as may be included in any applicable  resolution passed by a
majority of the whole  membership of the Board. A majority of those named to the
Executive Committee will constitute a quorum.

                                       -8-
<PAGE>
     3.08.  OTHER  COMMITTEES.  The Board of Directors may designate one or more
additional committees, each committee to consist of one or more of the directors
of the Company.  The Board of Directors may  designate one or more  directors as
alternate  members of any committee,  who may replace any absent or disqualified
member at any  meeting  of the  committee.  Any such  committee,  to the  extent
permitted by law and to the extent  provided in the  resolution  of the Board of
Directors, shall have and may exercise all the powers and authority of the Board
of Directors in the  management of the business and affairs of the Company,  and
may  authorize  the seal of the  Company to be  affixed  to all papers  that may
require it.

     3.09.  COMMITTEE  FUNCTIONING.   Notice  requirements  and  related  waiver
provisions for meetings of the Executive  Committee and other  committees of the
Board will be the same as those set forth in Section  3.05 above for meetings of
the Board of Directors. Except as provided in the next two succeeding sentences,
a majority of those named to the Executive  Committee or any other  committee of
the Board will  constitute a quorum at any meeting  thereof  (with the effect of
departure of committee  members from a meeting and the computation of a majority
of committee members to be in accordance with the applicable policies of Section
3.06 above), and any matter submitted to a meeting of any such committee will be
resolved by a majority of the votes cast thereon.  No  distinction  will be made
among  ex-officio or other members of any such  committee for quorum,  voting or
other  purposes,  except that the  membership  of any committee  (including  the
Executive  Committee),  in  performing  any  function  vested  in it  as  herein
contemplated,  may be deemed to exclude any officer or employee of the  Company,
in either case, or other person having a direct or indirect personal interest in
any proposed  exercise of such  function,  whose  exclusion  for that purpose is
deemed  appropriate  by a  majority  of the  other  members  of  such  committee
proposing to perform such function.  All committees are to keep regular  minutes
of the transactions of their meetings.

     3.10.  ACTION BY  TELEPHONE  OR  CONSENT.  Any  meeting of the Board or any
committee thereof may be held by conference telephone or similar  communications
equipment as permitted by law, in which case any required notice of such meeting
may generally describe the arrangements  (rather than the place) for the holding
thereof,  and all other provisions herein contained or referred to will apply to
such meeting as though it were  physically  held at a single  place.  Action may
also be taken by the Board or any  committee  thereof  without a meeting  if the
members thereof consent in writing thereto as contemplated by law.

     3.11.  PRESUMPTION OF ASSENT. A director of the Company who is present at a
meeting of the Board of Directors,  or of any committee when corporate action is
taken is deemed to have  assented  to the  action  taken  unless  either (i) the
director  objects at the beginning of the meeting or promptly on the  director's
arrival  to  holding  it or  transacting  business  at  the  meeting;  (ii)  the
director's dissent or abstention from the action taken is entered in the minutes
of the meeting;  or (iii) the director delivers written notice of the director's
dissent  or  abstention  to the  presiding  officer  of the  meeting  before its
adjournment  or to the Company  before 5:00 P.M. on the next  business day after
the meeting.  The right of dissent or  abstention is not available to a director
who votes in favor of the action taken.

     3.12.  COMPENSATION.  By resolution of the Board, the directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors,
or of any  committee,  and may be paid a fixed sum for  attendance  at each such
meeting  and/or a stated  salary as a  director  or  committee  member.  No such

                                       -9-
<PAGE>
payment  will  preclude  any  director  from  serving  the  Company in any other
capacity and receiving compensation therefor.

     3.13. REMOVAL. Any director or the entire Board of Directors may be removed
with or without cause, only at a special meeting of shareholders called for that
purpose,  by the affirmative vote of sixty-six and two-thirds  percent (66 2/3%)
of the  issued and  outstanding  shares of stock  then  entitled  to vote on the
election of directors, except that if less than the entire Board of Directors is
to be removed,  no one of the directors may be removed if the votes cast against
the  director's  removal  would be  sufficient  to elect  the  director  if then
cumulatively  voted at an  election  for the  class of  directors  of which  the
director is a part.

                             IV. OFFICERS - GENERAL

     4.01. ELECTIONS AND APPOINTMENTS. The directors may elect or appoint one or
more of the  officers  of the  Company  contemplated  in Part V below.  Any such
election or  appointment  will regularly take place at the annual meeting of the
directors,  but  elections of officers  may be held at any other  meeting of the
Board.  A person  elected or appointed to any office will  continue to hold that
office until the election or  appointment  of his or her  successor,  subject to
action earlier taken pursuant to Section 4.04 or 6.01 below. Any person may hold
more than one office.

     4.02. ADDITIONAL APPOINTMENTS.  In addition to the officers contemplated in
Part V below, the Board of Directors may create other corporate  positions,  and
appoint  persons  thereto,  with such authority to perform such duties as may be
prescribed  from time to time by the Board of Directors,  by the President or by
the superior officer of any person so appointed. Notwithstanding such additional
appointments, only those persons whose offices are described in Part V are to be
considered an officer of the Company unless the resolution or other Board action
appointing such person  expressly states that such person is to be considered an
officer of the  Company.  Each of such persons (in the order  designated  by the
Board or the  superior  officer of such  person)  will be vested with all of the
powers and charged with all of the duties of his or her superior  officer in the
event of such superior officer's absence or disability.

     4.03. BONDS AND OTHER REQUIREMENTS.  The Board of Directors may require any
officer or other appointee to give bond to the Company (with sufficient  surety,
and conditioned upon the faithful performance of the duties of his or her office
or position)  and to comply with such other  conditions as may from time to time
be required of him or her by the Board.

     4.04.  REMOVAL  OR  DELEGATION.  Provided  that a  majority  of  the  whole
membership  thereof  concurs  therein,  the Board of  Directors  may  remove any
officer  of the  Company as  provided  by law and  declare  his or her office or
offices  vacant or abolished or, in the case of the absence or disability of any
officer or for any other reason considered sufficient,  may temporarily delegate
his or her powers and duties to any other  officer or to any  director.  Similar
action may be taken by the Board of Directors in regard to appointees designated
pursuant to Section 4.02 above.

     4.05.  SALARIES.  Officer  salaries  may from  time to time be fixed by the
Board of Directors or (except as to his or her own) be left to the discretion of
the Chief Executive Officer or the President.  No officer will be prevented from

                                      -10-
<PAGE>
receiving  a salary by reason of the fact that he or she is also a  director  of
the Company.

                   V. SPECIFIC OFFICERS, FUNCTIONS AND POWERS

     5.01. CHAIRMAN OF THE BOARD. The Board of Directors may elect a Chairman to
serve as a  general  executive  officer  of the  Company  and,  if  specifically
designated as such by the Board, as the Chief Executive  Officer of the Company.
If elected,  the Chairman  will preside at all meetings of the  directors and be
vested  with such  other  powers  and  duties as the Board may from time to time
delegate to him or her.

     5.02.  CHIEF  EXECUTIVE  OFFICER.  Subject  to the  control of the Board of
Directors exercised as hereinafter provided,  the Chief Executive Officer of the
Company will  supervise  its business and affairs and the  performance  of their
respective duties by all other officers,  by appointees  designated  pursuant to
Section  4.02  above,  and by such  additional  appointees  to  such  additional
positions  (corporate,  divisional or otherwise) as the Chief Executive  Officer
may designate,  with authority on his or her part to delegate the foregoing duty
of supervision to such extent and to such person or persons as may be determined
by the Chief Executive Officer.  Except as otherwise indicated from time to time
by  resolution  of the Board of  Directors,  its  management of the business and
affairs  of the  Company  will be  implemented  through  the office of the Chief
Executive Officer.

     5.03.  PRESIDENT AND VICE  PRESIDENTS.  Unless specified to the contrary by
resolution of the Board of Directors,  the President will be the Chief Executive
Officer of the Company. In addition to the supervisory functions above set forth
on the part of the Chief  Executive  Officer  or in lieu  thereof  if a contrary
specification is made by the Board relative to the Chief Executive Officer,  the
President  will be vested with such powers and duties as the Board may from time
to time  designate.  Vice Presidents may be elected by the Board of Directors to
perform  such  duties  as may be  designated  by the  Board  or be  assigned  or
delegated to them by their respective superior officers.  The Board may identify
(i) one or more Vice  Presidents as "Executive" or "Senior" Vice  Presidents and
(ii) the President or any Vice President as "General Manager" of the Company and
the title of any Vice  President  may  include  words  indicative  of his or her
particular area of responsibility and authority. Vice Presidents will succeed to
the responsibilities and authority of the President,  in the event of his or her
absence or disability,  in the order consistent with their respective  titles or
regular duties or as specifically designated by the Board of Directors.

     5.04.  TREASURER AND  SECRETARY.  The  Treasurer  and  Secretary  each will
perform all such duties normally  associated with his or her office  (including,
in the case of the  Secretary,  the  giving of notice  and the  preparation  and
retention  of minutes of  corporate  proceedings  and the  custody of  corporate
records and the seal of the Company) as are not assigned to a Vice  President of
the Company,  along with such other duties as may be  designated by the Board or
be assigned or  delegated to them by their  respective  superior  officers.  The
Board may appoint one or more  Assistant  Treasurers  or Assistant  Secretaries,
each of whom (in the order designated by the Board or their respective  superior
officers)  will be vested  with all of the  powers and  charged  with all of the
duties of the  Treasurer or the  Secretary  (as the case may be) in the event of
his or her absence or disability.

                                      -11-
<PAGE>
     5.05. SPECIFIC POWERS.  Except as may otherwise be specifically provided in
a resolution of the Board of Directors,  any of the officers referred to in this
Part V will be a proper  officer to  authenticate  records of the Company and to
sign on  behalf  of the  Company  any deed,  bill of sale,  assignment,  option,
mortgage, pledge, note, bond, debenture, evidence of indebtedness,  application,
consent  (to service of process or  otherwise),  agreement,  indenture  or other
instrument  of  importance  to the Company.  Any such officer may  represent the
Company at any  meeting  of the  shareholders  or  members  of any  corporation,
association,  partnership,  joint  venture or other entity in which this Company
then has an interest, and may vote such interest in person or by proxy appointed
by him or her, provided that the Board of Directors may from time to time confer
the foregoing authority upon any other person or persons.

                         VI. RESIGNATIONS AND VACANCIES

     6.01.  RESIGNATIONS.  Any director,  committee member or officer may resign
from his or her office at any time by written  notice as specified in accordance
with Arizona Revised  Statutes  Sections 10-807 and 10-843.  The acceptance of a
resignation will not be required to make it effective.

     6.02. VACANCIES. If the office of any director, committee member or officer
becomes  vacant by reason of his or her  death,  resignation,  disqualification,
removal or  otherwise,  the Board of  Directors  may choose a successor  to hold
office for the unexpired term.

                      VII. INDEMNIFICATION AND RATIFICATION

     7.01.  INDEMNIFICATION.  In order to induce qualified  persons to serve the
Company (and any other corporation,  joint venture, partnership,  trust or other
enterprise at the request of the Company) as directors and officers, the Company
shall indemnify any and all of its directors and officers,  or former  directors
and officers to the fullest  extent  permitted by applicable law as it presently
exists or may hereafter be amended.

     7.02.  RATIFICATION;  SPECIAL  COMMITTEE.  Any  transaction  involving  the
Company, any of its subsidiary  corporations or any of its directors,  officers,
employees  or agents  which at any time is  questioned  in any manner or context
(including a shareholders  derivative suit), on the ground of lack of authority,
conflict  of  interest,   misleading  or  omitted  statement  of  fact  or  law,
nondisclosure,  miscomputation,  improper principles or practices of accounting,
inadequate records,  defective or irregular execution or any similar ground, may
be investigated  and/or ratified (before or after judgment),  or an election may
be made not to  institute  or  pursue a claim or legal  proceedings  on  account
thereof or to accept or approve a negotiated  settlement  with  respect  thereto
(before  or  after  the  institution  of  legal  proceedings),  by the  Board of
Directors  or  by  a  special   committee  thereof  comprised  of  one  or  more
disinterested   directors  (that  is,  a  director  or  directors  who  did  not
participate  in  the  questioned   transaction  with  actual  knowledge  of  the
questioned aspect or aspects  thereof).  Such a special committee may be validly
formed and fully  empowered to act, in  accordance  with the purposes and duties
assigned  thereto,  by  resolution  or  resolutions  of the Board of  Directors,
notwithstanding  (i) the inclusion of Board members who are not disinterested as
aforesaid  among those who form a quorum at the meeting or meetings at which one
or more members of such special  committee are elected or appointed to the Board
or to such special  committee or at which such committee is formed or empowered,

                                      -12-
<PAGE>
or their inclusion among the directors who vote upon or otherwise participate in
taking any of the foregoing  actions,  or (ii) the taking of any of such actions
by the disinterested  members of the Board (or a majority of such members) whose
number is not  sufficient to constitute a quorum or a majority of the membership
of the full Board.  Any such special  committee so comprised  will,  to the full
extent  consistent  with its purposes and duties as expressed in such resolution
or  resolutions,  have all of the authority and powers of the full Board and its
Executive  Committee  (the  same as  though it were the full  Board  and/or  its
Executive  Committee in carrying out such purposes and duties) and will function
in accordance with Section 3.09 above. No other provisions of these Bylaws which
may at any time appear to conflict with any provisions of this Section 7.02, and
no defect or  irregularity  in the  formation,  empowering or functioning of any
such special committee,  will serve to impede, impair or bring into question any
action taken or  purported to be taken by such  committee or the validity of any
such action.  Any  ratification  of a transaction  pursuant to this Section 7.02
will  have the  same  force  and  effect  as if the  transaction  has been  duly
authorized originally. Any such ratification,  and any election made pursuant to
this Section 7.02 with respect to claims, legal proceedings or settlements, will
be binding upon the Company and its  shareholders  and will  constitute a bar to
any  claim or the  execution  of any  judgment  in  respect  of the  transaction
involved in such ratification or election.

                                   VIII. SEAL

     8.01. FORM THEREOF. The seal of the Company will have inscribed thereon the
name of the  Company,  the  state  and year of its  incorporation  and the words
"SEAL".

                             IX. STOCK CERTIFICATES

     9.01. FORM THEREOF. Each certificate representing stock of the Company will
be in such form  conforming  to law as may from time to time be  approved by the
Board of Directors,  and will bear the manual  facsimile  signatures and seal of
the Company as required or permitted by law.

     9.02. OWNERSHIP. The Company will be entitled to treat the registered owner
of any share as the absolute owner thereof and accordingly, will not be bound to
recognize  any  beneficial,  equitable  or other claim to, or interest  in, such
share on the part of any other  person,  whether or not it has  notice  thereof,
except as may  expressly be provided by Chapter 8 of Title 47,  Arizona  Revised
Statutes (or its successor), as at the time in effect, or other applicable law.

     9.03. TRANSFERS. Transfer of stock will be made on the books of the Company
only upon surrender of the certificate therefor, duly endorsed by an appropriate
person,  with  such  assurance  of  the  genuineness  and  effectiveness  of the
endorsement  as the Company may  require,  all as  contemplated  by Chapter 8 of
Title 47, Arizona Revised Statutes (or its successor), as at the time in effect,
and/or upon  submission  of any  affidavit,  other  document or notice which the
Company considers necessary.

     9.04. LOST CERTIFICATES.  In the event of the loss, theft or destruction of
any  certificate  representing  capital stock of this  Company,  the Company may
issue (or,  in the case of any such stock as to which a  transfer  agent  and/or
registrar have been appointed,  may direct such transfer agent and/or  registrar
to  countersign,  register and issue) a replacement  certificate in lieu of that

                                      -13-
<PAGE>
alleged to be lost,  stolen or destroyed,  and cause the same to be delivered to
the owner of the stock represented  thereby,  provided that the owner shall have
submitted such evidence showing the  circumstances of the alleged loss, theft or
destruction,  and  his  or  her  ownership  of the  certificate  as the  Company
considers  satisfactory,  together  with any other  factors  which  the  Company
considers  pertinent,  and further  provided that an indemnity  agreement and/or
indemnity bond shall have been provided in form and amount  satisfactory  to the
Company and to its transfer agent and/or registrar, if applicable.

                               X. EMERGENCY BYLAWS

     10.01.  EMERGENCY CONDITIONS.  The emergency Bylaws provided in this Part X
will be as  effective  in the event of an  emergency  as  prescribed  in Arizona
Revised  Statutes  Section  10-207.D.  To the extent not  inconsistent  with the
provisions  of this Part X,  these  Bylaws  will  remain in effect  during  such
emergency  and upon its  termination  these  emergency  Bylaws  will cease to be
operative.

     10.02. BOARD MEETINGS. During any such emergency, a meeting of the Board of
Directors or any of its  committees  may be called by any officer or director of
the  Company.  Notice of the time and place of the meeting  will be given by the
person  calling  the same to those of the  directors  whom it may be feasible to
reach by any available means of communication. Such notice will be given so much
in advance of the meeting as circumstances  permit in the judgment of the person
calling  the same.  At any  Board or  committee  meeting  held  during  any such
emergency,  a quorum will consist of a majority of those who could reasonably be
expected  to attend the  meeting if they were  willing to do so, but in no event
more than a majority of those to whom notice of such meeting is required to have
been given as above provided.

     10.03. CERTAIN ACTIONS. The Board of Directors, either before or during any
such emergency,  may provide and from time to time modify lines of succession in
the  event  that  during  such an  emergency  any or all  officers,  appointees,
employees  or agents of the Company  are for any reason  rendered  incapable  of
discharging their duties. The Board, either before or during any such emergency,
may,  effective in the  emergency,  change the head office or designate  several
alternative head offices of the Company, or authorize the officers to do so.

     10.04. LIABILITY. No director, officer, appointee, employee or agent acting
in  accordance  with these  emergency  Bylaws will be liable  except for willful
misconduct.

     10.05.  MODIFICATIONS.  These emergency Bylaws will be subject to repeal or
change by further action of the Board of Directors, but no such repeal or change
will modify the  provisions  of Section 10.04 with respect to action taken prior
to the time of such repeal or change.  Any amendment of these  emergency  Bylaws
may make any further or different provisions that may be practical and necessary
for the circumstances of the emergency.

                                  XI. DIVIDENDS

     11.01. DECLARATION.  Subject to such restrictions or requirements as may be
imposed by law or the Company's Articles or as may otherwise be binding upon the
Company, the Board of Directors may from time to time declare dividends on stock
of the Company outstanding on the dates of record fixed by the Board, to be paid

                                      -14-
<PAGE>
in cash,  in  property  or in  shares  of the  Company's  stock on or as of such
payment or distribution dates as the Board may prescribe.

                           XII. BUSINESS COMBINATIONS

     12.01. DEFINITIONS. In these Bylaws, the following definitions shall apply:

          1.   "Affiliate" means a person that directly or indirectly  controls,
               is  controlled  by, or is under  common  control with a specified
               person.

          2.   "Announcement  date,"  when  used in  reference  to any  business
               combination,  means the date of the first public  announcement of
               the final, definitive proposal for the business combination.

          3.   "Associate,"  when  used to  indicate  a  relationship  with  any
               person, means any of the following:

               (a)  Any  corporation or  organization  of which the person is an
                    officer,   director,  or  partnership  or  is,  directly  or
                    indirectly,  the  beneficial  owner of ten percent  (10%) or
                    more of any class or series  of shares  entitled  to vote or
                    other equity interest;

               (b)  Any trust or estate in which the  person  has a  substantial
                    beneficial  interest  or as to which  the  person  serves as
                    trustee or personal representative or in a similar fiduciary
                    capacity; or

               (c)  Any relative or spouse of the person, or any relative of the
                    spouse, residing in the home of the person.

          4.   "Beneficial  owner,"  when used with  respect  to shares or other
               securities,  includes  any person  who,  directly  or  indirectly
               through any agreement, arrangement, relationship,  understanding,
               or otherwise,  whether or not in writing, has or shares the power
               to vote,  or direct the voting of the shares or securities or has
               or shares the power to dispose  of or direct the  disposition  of
               the shares or securities, except that:

               (a)  A person is not  deemed  the  beneficial  owner of shares or
                    securities  tendered  pursuant to a tender or exchange offer
                    made by the  person  or any of the  person's  affiliates  or
                    associates  until  the  tendered  shares or  securities  are
                    accepted for purchase or exchange; and

               (b)  A person is not  deemed  the  beneficial  owner of shares or
                    securities with respect to which the person has the power to
                    vote or direct the voting  arising  solely  from a revocable
                    proxy given in response to a proxy solicitation  required to
                    be made and made in accordance with the applicable rules and
                    regulations  under the  Securities  Exchange Act of 1934, as
                    amended,  and is not  then  reportable  under  that act on a
                    Schedule 13D or comparable report.

                                      -15-
<PAGE>
          5.   "Beneficial  ownership"  includes the right to acquire  shares or
               securities through the exercise of options,  warrants, or rights,
               the  conversion of  convertible  securities,  or  otherwise.  The
               shares or securities subject to the options, warrants, rights, or
               conversion   privileges  held  by  a  person  are  deemed  to  be
               outstanding  for the  purpose  of  computing  the  percentage  of
               outstanding  shares or securities of the class or series owned by
               the person but are not deemed to be  outstanding  for the purpose
               of computing  the  percentage of the class or series owned by any
               other person.  A person is deemed the beneficial  owner of shares
               and securities  beneficially owned by the spouse of the person or
               any  relative  of the spouse  residing in the home of the person,
               any trust or estate in which the person owns ten percent (10%) or
               more of the total  beneficial  interest  or serves as  trustee or
               personal  representative,  any corporation or entity in which the
               person  owns  ten  percent  (10%) or more of the  equity  and any
               affiliate of the person.

          6.   "Business combination," when used in reference to the Company and
               any  interested  shareholder  of the  Company,  means  any of the
               following:

               (a)  Any merger or consolidation of the Company or any subsidiary
                    of the Company with either:

                    (i)   The interested shareholder; or

                    (ii)  Any other domestic or foreign corporation,  whether or
                          not itself an interested  shareholder  of the Company,
                          that is, or after the merger would be, an affiliate or
                          associate of the interested  shareholder,  except that
                          the  foregoing  does  not  include  the  merger  of  a
                          wholly-owned   subsidiary  of  the  Company  into  the
                          Company  or the  merger  of two or  more  wholly-owned
                          subsidiaries of the Company.

               (b)  Any exchange,  pursuant to a plan of exchange under the laws
                    of the State of Arizona or a comparable statute of any other
                    state or  jurisdiction,  of  shares  of the  Company  or any
                    subsidiary of the Company for shares of either:

                    (i)   The interested shareholder; or

                    (ii)  Any other domestic or foreign corporation,  whether or
                          not itself an interested  shareholder  of the Company,
                          that is, or after the exchange  would be, an affiliate
                          or associate of the interested shareholder.

               (c)  Any sale, lease, exchange,  mortgage,  pledge,  transfer, or
                    other  disposition,  in a single  transaction or a series of
                    transactions,  to or with the interested  shareholder or any
                    affiliate  or associate of the  interested  shareholder,  of

                                      -16-
<PAGE>
                    assets of the  Company or any  subsidiary  of the Company to
                    which any of the following applies:

                    (i)   Has an  aggregate  market  value  equal to ten percent
                          (10%) or more of the aggregate market value of all the
                          assets,  determined on a  consolidated  basis,  of the
                          Company.

                    (ii)  Has an  aggregate  market  value  equal to ten percent
                          (10%) or more of the aggregate market value of all the
                          outstanding shares of the Company.

                    (iii) Represents  ten  percent  (10%) or more of the earning
                          power  or net  income,  determined  on a  consolidated
                          basis, of the Company.

               (d)  The issuance or transfer by the Company or any subsidiary of
                    the  Company,  in  a  single  transaction  or  a  series  of
                    transactions, of any shares of the Company or any subsidiary
                    of the Company that have an aggregate  market value equal to
                    five percent (5%) or more of the  aggregate  market value of
                    all the outstanding  shares of the Company to the interested
                    shareholder  or any affiliate or associate of the interested
                    shareholder,  except pursuant to the exercise of warrants or
                    rights  to  purchase   shares   offered  or  a  dividend  or
                    distribution  paid or made pro rata to all  shareholders  of
                    the Company.

               (e)  The adoption of any plan or proposal for the  liquidation or
                    dissolution of the Company,  or any  reincorporation  of the
                    Company in another  state or  jurisdiction,  proposed by, on
                    behalf of, or pursuant  to any  agreement,  arrangement,  or
                    understanding,   whether  or  not  in   writing,   with  the
                    interested  shareholder or any affiliate or associate of the
                    interested shareholder.

               (f)  Any  reclassification  of  securities,  including  any share
                    dividend   or  split,   reverse   share   split,   or  other
                    distribution    of   shares   in    respect    of    shares,
                    recapitalization of the Company,  merger or consolidation of
                    the Company with any  subsidiary of the Company  exchange of
                    shares of the Company with any  subsidiary of the Company or
                    other transaction,  whether or not with or into or otherwise
                    involving the interested shareholder, proposed by, on behalf
                    of,  or  pursuant   to  any   agreement,   arrangement,   or
                    understanding,   whether  or  not  in   writing,   with  the
                    interested  shareholder or any affiliate or associate of the
                    interested  shareholder  that has the  effect,  directly  or
                    indirectly,  of increasing  the  proportionate  share of the
                    outstanding shares of any class or series of shares entitled
                    to  vote,  or  securities  that  are   exchangeable  for  or
                    convertible  into or that  carry a right to  acquire  shares
                    entitled to vote,  of the Company or any  subsidiary  of the

                                      -17-
<PAGE>
                    Company  that  is,  directly  or  indirectly,  owned  by the
                    interested  shareholder or any affiliate or associate of the
                    interested  shareholder,  except as a result  of  immaterial
                    changes due to fractional share adjustments.

               (g)  Any receipt by the  interested  shareholder or any affiliate
                    or associate of the  interested  shareholder of the benefit,
                    directly  or  indirectly,   except   proportionately   as  a
                    shareholder  of  the  Company,   of  any  loans,   advances,
                    guarantees,  pledges,  or other financial  assistance or any
                    tax credits or other tax  advantages  provided by or through
                    the Company or any  subsidiary  of the  Company  (other than
                    expense  account  advances  made in the  ordinary  course of
                    business).

          7.   "Consummation  date," with respect to any  business  combination,
               means the date of consummation of the business combination or, in
               the case of a business combination as to which a shareholder vote
               is taken, the later of:

               (i)  The business day before the vote; or

               (ii) Twenty  (20) days  before  the date of  consummation  of the
                    business combination.

          8.   "Control,"  "controlling,"   "controlled  by"  or  "under  common
               control with" means the  possession,  directly or indirectly,  of
               the power to direct or cause the direction of the  management and
               policies of a person,  whether  through the  ownership  of voting
               securities,  by contract,  or  otherwise.  A person's  beneficial
               ownership of ten percent (10%) or more of the voting power of the
               Company's  outstanding shares entitled to vote in the election of
               directors  creates a  presumption  that the person has control of
               the Company.  A person is not  considered  to have control of the
               Company if the person holds voting  power,  in good faith and not
               for the purpose of  avoiding  any  provision  of law as an agent,
               bank,  broker,  nominee,  custodian,  or trustee  for one or more
               beneficial  owners  who do not  individually  or as a group  have
               control of the Company.

          9.   "Interested  shareholder,"  when used in reference to the Company
               means any person, other than the Company or any subsidiary of the
               Company, that is either:

               (a)  The beneficial owner, directly or indirectly, of ten percent
                    (10%) or more of the voting power of the outstanding  shares
                    entitled to vote of the Company; or

               (b)  An affiliate or associate of the Company.

                                      -18-
<PAGE>
          10.  "Interested  shares" means the shares of the Company with respect
               to which any of the following  persons may exercise or direct the
               exercise  of voting  power in the  election of  directors  of the
               Company:

               (a)  An interested shareholder;

               (b)  Any officer of the Company; or

               (c)  Any director of the Company.

          11.  "Market  value,"  when used in reference to shares or property of
               the Company, means the following:

               (a)  In the case of shares, the highest closing sale price during
                    the thirty (30) day period immediately preceding the date in
                    question of a share on the composite tape for New York Stock
                    Exchange  listed  shares or, if the shares are not quoted on
                    the  composite  tape or not  listed  on the New  York  Stock
                    Exchange, on the principal United States securities exchange
                    registered  under the  Securities  Exchange Act of 1934,  as
                    amended, on which the share are listed or, if the shares are
                    not listed on any such exchange, on the National Association
                    of Securities  Dealers,  Inc. Automated  Quotations National
                    Market  System  or,  if the  shares  are not  quoted  on the
                    National  Association of Securities Dealers,  Inc. Automated
                    Quotations  National Market System,  the highest closing bid
                    quotation  during the thirty (30) day period  preceding  the
                    date in question of a share on the National  Association  of
                    Securities Dealers,  Inc. Automated Quotations System or any
                    system then in use or, if no such  quotation  is  available,
                    the fair market  value on the date in question of a share as
                    determined  in  good  faith  by the  Board  of the  Company,
                    subject to arbitration.

               (b)  In the case of property other than cash or shares,  the fair
                    market  value of the  property  on the date in  question  as
                    determined  in  good  faith  by the  Board  of the  Company,
                    subject to arbitration.

          12.  "Person"  means any  natural  person,  partnership,  corporation,
               group,  association,  venture,  firm, or other entity (other than
               the  Company,  any  subsidiary  of the  Company,  or a trustee or
               fiduciary  holding  stock for the benefit of the employees of the
               Company  or  its  subsidiaries  or any  one of its  subsidiaries,
               pursuant to one or more employee  benefit plans).  If two or more
               persons act as a partnership, limited partnership,  syndicate, or
               other group pursuant to any agreement, arrangement, relationship,
               understanding,  or otherwise,  whether or not in writing, for the
               purposes of acquiring,  owning,  or voting shares of the Company,
               all members of the partnership,  syndicate,  or other group shall
               be deemed a person.  Person does not  include a licensed  broker,
               dealer,  or  underwriter  that  purchases  shares of the  Company

                                      -19-
<PAGE>
               solely for purposes of resale to the public that is not acting in
               concert with an interested shareholder.

          13.  "Share  acquisition  date,"  with  respect  to any person and the
               Company,  means  the  date  that  the  person  first  becomes  an
               interested shareholder of the Company.

     12.02.  BUSINESS  COMBINATION  WITH  INTERESTED  SHAREHOLDERS;  APPROVED BY
DIRECTORS.

          1.   Except as set forth in these  Bylaws,  the Company may not engage
               in any business  combination or vote, consent or otherwise act to
               authorize a  subsidiary  of the Company to engage in any business
               combination  with  respect to,  proposed  by, or on behalf of, or
               pursuant to any agreement, arrangement or understanding,  whether
               or not in writing, with any interested shareholder of the Company
               or any affiliate or associate of the interested shareholder for a
               period  of three (3) years  after  the  interested  shareholder's
               share acquisition  date,  unless the business  combination or the
               acquisition of shares made by the  interested  shareholder on the
               interested  shareholder's share acquisition date is approved by a
               committee  of the Board of  Directors  of the Company  before the
               interested  shareholder's  share  acquisition date. The committee
               shall be formed in accordance  with  subsection 4 of this Section
               12.02.

          2.   If  a  good  faith  definitive   proposal  regarding  a  business
               combination  is made in writing to the Board of  Directors of the
               Company,  a  committee  of the Board  formed in  accordance  with
               subsection 4 of this Section 12.02 shall consider and take action
               on the proposal  and respond in writing  within  forty-five  (45)
               days after receipt of the proposal by the Company,  setting forth
               its decision regarding the proposal.

          3.   If a good faith definitive  proposal to acquire shares is made in
               writing to the Board of Directors of the Company,  a committee of
               the Board of Directors  formed in accordance with subsection 4 of
               this  Section  12.02  shall  consider  and  take  action  on  the
               proposal.  Unless the committee responds affirmatively in writing
               within  forty-five (45) days after receipt of the proposal by the
               Company,  the committee  shall be considered to have  disapproved
               the share acquisition.

          4.   When a business  combination or acquisition of shares is proposed
               pursuant to this  Section  12.02,  the Board of  Directors  shall
               promptly  form  a  committee  composed  of  all  of  the  Board's
               disinterested  Directors.  The committee shall take action on the
               proposal  by the  affirmative  vote of a simple  majority  of the
               committee members.  The committee is not subject to any direction
               or  control  by  the  Board  with  respect  to  the   committee's
               consideration of or any action concerning a business  combination
               or  acquisition  of shares  pursuant  to this  Section  12.02.  A
               committee formed pursuant to this subsection shall be composed of
               one or more members. Only disinterested  Directors may be members

                                      -20-
<PAGE>
               of a committee  formed pursuant to this subsection.  However,  if
               the Board of Directors has no disinterested  Directors, the Board
               shall select three or more disinterested  persons to be committee
               members. For purposes of this subsection, a Director or person is
               disinterested  if the  Director  or person  is not an  interested
               shareholder  or an  affiliate  thereof  or a  present  or  former
               officer or employee of the Company or an  affiliate  or associate
               of the Company.

     12.03.  Requirements  after  Three  Years.  Except  for the  provisions  of
Sections 12.02 and 12.04, the Company may not engage at any time in any business
combination or vote,  consent, or otherwise act to authorize a subsidiary of the
Company to engage in any business  combination  with respect to, proposed by, on
behalf of, or pursuant to any agreement, arrangement, or understanding,  whether
or not in  writing,  with  an  interested  shareholder  of  the  Company  or any
affiliate  or  associate  of the  interested  shareholder  other than a business
combination meeting all the requirements of this Article XII, the Articles,  and
the requirements specified in any of the following:

          1.   A business  combination  with  respect to which the  consummation
               date is no less than  three  years  after  the share  acquisition
               date,  approved by the Board of Directors  of the Company  before
               the interested  shareholder's  share  acquisition  date, or as to
               which  the   acquisition   of  shares  made  by  the   interested
               shareholder on the interested shareholder's  acquisition date had
               been  approved by the Board of  Directors  before the  interested
               shareholder's share acquisition date.

          2.   A business  combination  approved by the affirmative  vote of the
               holders of a majority of the outstanding  shares entitled to vote
               not beneficially  owned by the interested  shareholder  proposing
               the  business  combination  or any  affiliate or associate of the
               interested  shareholder  proposing the business  combination at a
               meeting called for that purpose no earlier than three years after
               the interested shareholder's share acquisition date.

          3.   A business  combination,  with respect to which the  consummation
               date  is  no  earlier  than  three  years  after  the  interested
               shareholder's  share  acquisition  date,  that  meets  all of the
               following conditions:

               (a)  The aggregate  amount of the cash and the market value as of
                    the consummation date of consideration other than cash to be
                    received per share by holders of  outstanding  common shares
                    of the Company in the business combination is at least equal
                    to the higher of the following:

                    (i)   The  highest  per share  price paid by the  interested
                          shareholder, at a time when the interested shareholder
                          was the beneficial owner,  directly or indirectly,  of
                          five  percent (5%) or more of the  outstanding  shares
                          entitled to vote of the Company, for any common shares
                          of the same class or series  acquired by it within the

                                      -21-
<PAGE>
                          three  (3)  year   period   immediately   before   the
                          announcement   date  with   respect  to  the  business
                          combination  or  within  the  three  (3)  year  period
                          immediately  before,  or in, the  transaction in which
                          the  interested   shareholder   became  an  interested
                          shareholder,  whichever  is  higher,  plus,  in either
                          case,  interest  compounded annually from the earliest
                          date on which the highest per share  acquisition price
                          was paid through the consummation date at the rate for
                          one year United States treasury  obligations from time
                          to time in  effect  less the  aggregate  amount of any
                          cash  dividends  paid,  and the  market  value  of any
                          dividends  paid other than in cash,  per common  share
                          since  the  earliest  date,  up to the  amount  of the
                          interest.

                    (ii)  The market value per common share on the  announcement
                          date with  respect to the business  combination  or on
                          the interested  shareholder's  share acquisition date,
                          whichever is higher, plus interest compounded annually
                          from that date  through the  consummation  date at the
                          rate for one year United States  treasury  obligations
                          from time to time in effect less the aggregate  amount
                          of any cash dividends paid and the market value of any
                          dividends  paid other than in cash,  per common  share
                          since that date, up to the amount of the interest.

               (b)  The aggregate  amount of the cash and the market value as of
                    the consummation date of consideration other than cash to be
                    received per share by holders of  outstanding  shares of any
                    class or series of shares,  other than common shares, of the
                    Company in the business combination is at least equal to the
                    highest  of the  following,  whether  or not the  interested
                    shareholder has previously  acquired any shares of the class
                    or series:

                    (i)   The  highest  per share  price paid by the  interested
                          shareholder, at a time when the interested shareholder
                          was the beneficial owner,  directly or indirectly,  of
                          five  percent (5%) or more of the  outstanding  shares
                          entitled to vote of the Company, for any shares of the
                          class or series  acquired  by it within  the three (3)
                          year period  immediately  before the announcement date
                          with respect to the business combination or within the
                          three (3) year period  immediately  before, or in, the
                          transaction in which the interested shareholder became
                          an interested shareholder,  whichever is higher, plus,
                          in either case,  interest compounded annually from the

                                      -22-
<PAGE>
                          earliest   date  on  which  the   highest   per  share
                          acquisition  price was paid  through the  consummation
                          date at the rate for one year United  States  treasury
                          obligations  from  time  to time in  effect  less  the
                          aggregate  amount of any cash  dividends  paid and the
                          market value of any dividends paid other than in cash,
                          per share of the class or series  since such  earliest
                          date, up to the amount of the interest.

                    (ii)  The highest preferential amount per share to which the
                          holders of shares of the class or series are  entitled
                          in   the   event   of   any   voluntary   liquidation,
                          dissolution,  or winding up of the  Company,  plus the
                          aggregate amount of any unpaid  dividends  declared or
                          due  as to  which  the  holders  are  entitled  before
                          payment of  dividends on some other class or series of
                          shares,  unless the aggregate  amount of the dividends
                          is included in the preferential amount.

                    (iii) The  market  value per share of the class or series on
                          the  announcement  date with  respect to the  business
                          combination or on the interested  shareholder's  share
                          acquisition date,  whichever is higher,  plus interest
                          compounded   annually   from  that  date  through  the
                          consummation  date at the  rate  for one  year  United
                          States  treasury  obligations  from  time  to  time in
                          effect less the aggregate amount of any cash dividends
                          paid and the market value of any dividends  paid other
                          than in cash,  per share of the class or series  since
                          that date, up to the amount of the interest.

               (c)  The  consideration to be received by holders of a particular
                    class or  series of  outstanding  shares,  including  common
                    shares,  of the Company in the  business  combination  is in
                    cash or in the same form as the interested  shareholder  has
                    used to acquire the largest number of shares of the class or
                    series  of  shares   previously   acquired  by  it  and  the
                    consideration is distributed promptly.

               (d)  The  holders of all  outstanding  shares of the  Company not
                    beneficially owned by the interested shareholder immediately
                    before the  consummation  date with  respect to the business
                    combination   are   entitled  to  receive  in  the  business

                                      -23-
<PAGE>
                    combination  cash or other  consideration  for the shares in
                    compliance with subdivisions (a), (b) and (c).

               (e)  After the interested  shareholder's  share  acquisition date
                    and  before  the  consummation  date  with  respect  to  the
                    business  combination,  the interested  shareholder  has not
                    become  the  beneficial  owner  of  any  additional   shares
                    entitled to vote of the Company except:

                    (i)   As  part  of  the  transaction  that  resulted  in the
                          interested    shareholder   becoming   an   interested
                          shareholder;

                    (ii)  By  virtue  of  proportionate   share  splits,   share
                          dividends, or other distributions of shares in respect
                          of shares not constituting a business combination;

                    (iii) Through  a  business  combination  meeting  all of the
                          conditions of Section 12.02 and this paragraph; or

                    (iv)  Through purchase by the interested  shareholder at any
                          price that, if the price had been paid in an otherwise
                          permissible business combination the announcement date
                          and  consummation  date of which  were the date of the
                          purchase,  would have  satisfied the  requirements  of
                          subdivisions (a), (b) and (c) of this Section.

     12.04.  APPLICATION.  This  Article  XII  does not  apply  to any  business
combination  of the Company with an  interested  shareholder  of the Company who
became an interested  shareholder  inadvertently,  if the interested shareholder
both:

          1.   As soon as practicable,  divests itself of a sufficient amount of
               the shares  entitled  to vote of the Company so that it no longer
               is the beneficial owner,  directly or indirectly,  of ten percent
               (10%) or more of the  outstanding  shares entitled to vote of the
               Company.

          2.   Would not at any time within the three (3) year period  preceding
               the  announcement  date with respect to the business  combination
               have been an interested  shareholder  except for the  inadvertent
               acquisition.

                      XIII. LIMITATION ON SHARE REPURCHASES

     13.01. LIMITATION ON SHARE REPURCHASES.  The Company shall not, directly or
indirectly,  purchase  or agree to purchase  any shares  entitled to vote from a
person,  or two or more persons who act as a partnership,  limited  partnership,
syndicate or other group pursuant to any agreement,  arrangement,  relationship,
understanding  or  otherwise,  whether  or not in  writing,  for the  purpose of

                                      -24-
<PAGE>
acquiring,  owning or voting  shares of the Company who  beneficially  owns more
than five per cent (5%) of the  voting  stock of the  Company  for more than the
"average market price" of the shares if the shares have been beneficially  owned
by the person or persons for less than three (3) years,  unless the  purchase or
agreement  to  purchase  is  approved  at  a  meeting  of  shareholders  by  the
affirmative  vote of the holders of a majority of the voting  stock  entitled to
vote and not beneficially owned by such person or persons from whom the proposed
repurchase is to be made or the Company makes an offer,  of at least equal value
per share,  to all  holders of shares of such class or series and to all holders
of any class or series into which the shares may be converted.

     13.02.  DEFINITIONS.  For the  purposes of this  Article,  "AVERAGE  MARKET
PRICE"  means the average  closing  sale price  during the thirty  trading  days
immediately  preceding the purchase of the shares in question,  or if the person
or persons have  commenced a tender offer or have announced an intention to seek
control of the Company,  during the thirty trading days preceding the earlier of
the  commencement  of the tender offer or the making of the  announcement,  of a
share on the composite tape for New York Stock Exchange listed shares or, if the
shares are not quoted on the composite  tape or not listed on the New York Stock
Exchange,  on the principal United States securities  exchange  registered under
the Securities  Exchange Act of 1934, as amended, on which the shares are listed
or,  if the  shares  are  not  listed  on any  such  exchange,  on the  National
Association of Securities  Dealers,  Inc. Automated  Quotations  National Market
System  or,  if the  shares  are  not  quoted  on the  National  Association  of
Securities  Dealers,  Inc.  Automated  Quotations  National  Market System,  the
average  closing bid  quotation,  during the thirty  trading days  preceding the
purchase of the shares in questions of a share on the  National  Association  of
Securities Dealers,  Inc. Automated Quotations System or any system then in use,
or if the person or persons have  commenced a tender offer or have  announced an
intention to seek control of the issuing public  corporation,  during the thirty
trading days  preceding the earlier of the  commencement  of the tender offer or
the making of the  announcement,  except that if no quotation  is available  the
average  market  price is the fair  market  value on the date of purchase of the
shares  in  question  of a share as  determined  in good  faith by the  Board of
Directors of the Company.

                                 XIV. AMENDMENTS

     14.01.  AMENDMENT  OF  ARTICLES  AND  BYLAWS.   Notwithstanding  any  other
provision of these Bylaws,  Article  Fifth of the Articles  (Restated As of July
29, 1988) and Sections  2.02,  3.01, and 3.13 and Articles XII, XIII, and XIV of
these  Bylaws  shall  not  be  altered,  amended,  supplemented,   repealed,  or
temporarily or permanently suspended,  in whole or in part, or replacement Bylaw
provisions  adopted  without:  (I) the  affirmative  vote of a  majority  of the
directors then in office;  or (ii) the affirmative vote of seventy-five  percent
(75%)  or  more  of the  outstanding  shares  of the  Company  entitled  to vote
generally.

                                      -25-
<PAGE>
                                   CERTIFICATE


     I, FAYE  WIDENMANN,  Vice  President and Secretary of Pinnacle West Capital
Corporation,  an Arizona corporation,  do HEREBY CERTIFY that the foregoing is a
true and correct copy of the Company's Bylaws, as amended,  and that they are in
full force and effect as of the date hereof.

     IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the
corporation this 18th day of September 2002.

                                        Faye Widenmann
                                        ----------------------------------------
                                        FAYE WIDENMANN
                                        Vice President and Secretary

                                      -26-

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.2
<SEQUENCE>4
<FILENAME>ex3-2.txt
<DESCRIPTION>BYLAWS OF ARIZONA PUBLIC SERVICE COMPANY
<TEXT>
                                                                     Exhibit 3.2

                                     BYLAWS
                                       OF
                         ARIZONA PUBLIC SERVICE COMPANY
                       (AMENDED AS OF SEPTEMBER 18, 2002)


                            I. REFERENCES; SENIORITY

     1.01. REFERENCES.  Any reference herein made to law will be deemed to refer
to the law of the  State of  Arizona,  including  any  applicable  provision  or
provisions of Chapters 1-17 and Chapter 23 of Title 10, Arizona Revised Statutes
(or its successor), as at any given time in effect. Any reference herein made to
the Articles will be deemed to refer to the  applicable  provision or provisions
of the Articles of Incorporation of the Company,  and all amendments thereto, as
at any  given  time  on file  with  the  Arizona  Corporation  Commission  (this
reference  to that  Commission  being  intended to include any  successor to the
incorporating  and related  functions  being performed by that Commission at the
date of the initial adoption of these Bylaws).

     1.02. SENIORITY. Except as indicated in Part X of these Bylaws, the law and
the Articles (in that order of  precedence)  will in all respects be  considered
senior and superior to these Bylaws,  with any  inconsistency  to be resolved in
favor of the law and the Articles (in that order of precedence),  and with these
Bylaws to be deemed  automatically  amended from time to time to  eliminate  any
such inconsistency which may then exist.

     1.03.  SHAREHOLDERS  OF RECORD.  Except as  otherwise  required  by law and
subject to any procedure  established by the Company pursuant to Arizona Revised
Statutes  Section  10-723  (or any  comparable  successor  provision),  the word
"shareholder"  as used herein shall mean one who is a holder of record of shares
in the Company.

                            II. SHAREHOLDERS MEETINGS

     2.01. ANNUAL MEETINGS.  An annual meeting of shareholders shall be held for
the election of directors at such date, time and place, either within or without
the  State of  Arizona,  as may be  designated  by  resolution  of the  Board of
Directors from time to time. Any other proper  business may be transacted at the
annual  meeting.  A special  meeting may be called and held in lieu of an annual
meeting  pursuant  to the  provisions  of  Section  2.02  below,  and  the  same
proceedings (including the election of directors) may be conducted thereat as at
a regular  meeting.  Any  director  elected  at any annual  meeting,  or special
meeting in lieu of an annual meeting, will continue in office until the election
of his or her successor,  subject to his or her (a) earlier resignation pursuant
to Section 6.01 below,  (b) removal pursuant to Section 3.12 below, or (c) death
or disqualification.

     2.02.  SPECIAL  MEETINGS.  Except as  otherwise  required  by law,  special
meetings of the  shareholders  may be held  whenever and wherever  called by the
Chairman of the Board, the President, or a majority of the Board of Directors. A
special  meeting of  shareholders  shall also be called by the  President or the
Secretary  at the  written  request  of the  holder or  holders of not less than
seventy-five  percent (75%) of all outstanding  votes entitled to be cast on any
matter to be voted on at the meeting.  Any such written  request by shareholders
<PAGE>
shall state the purpose or purposes of the proposed meeting,  and business to be
transacted at any such meeting  shall be confined to the purposes  stated in the
notice thereof and to such additional matters as the chairman of the meeting may
rule to be germane to such purposes.

     2.03.  NOTICE.  Notice of any meeting of the shareholders  will be given as
provided by law to each  shareholder  entitled to vote at such  meeting  and, if
required by law, to each other  shareholder of the Company.  Any such notice may
be waived as provided by law.

     2.04.  RIGHT TO VOTE.  For each meeting of the  shareholders,  the Board of
Directors  will fix in advance a record  date as  contemplated  by law,  and the
shares of stock and the shareholders  "entitled to vote" (as that or any similar
term is herein used) at any meeting of the shareholders will be determined as of
the  applicable  record  date.  If no  record  date is so fixed by the  Board of
Directors,  the  record  date  for  determination  of  shareholders  shall be as
provided by law. The Secretary (or in his or her absence an Assistant Secretary)
will see to the making and production of any record of shareholders  entitled to
vote or otherwise  entitled to notice of shareholders  meetings,  in either case
which is required by law. Any voting entitlement may be exercised through proxy,
or in such other manner as specifically  provided by law, in accordance with the
applicable  law. In the event of contest,  the burden of proving the validity of
any undated or  irrevocable  proxy will rest with the person seeking to exercise
the same. A telegram, cablegram, or facsimile appearing to have been transmitted
by a shareholder  (or by his or her duly authorized  attorney-in-fact)  or other
means of voting by telephone  or  electronic  transmission  may be accepted as a
sufficiently written and executed proxy if otherwise permitted by law.

     2.05. RIGHT TO ATTEND.  Except only to the extent of persons  designated by
the Board of  Directors  or the Chairman of the meeting to assist in the conduct
of the  meeting (as  referred to in Sections  2.07 and 2.08 below) and except as
otherwise  permitted  by the Board or such  Chairman,  the  persons  entitled to
attend any meeting of shareholders may be confined to (i) shareholders  entitled
to vote  thereat  and other  shareholders  entitled to notice of the meeting and
(ii) the persons upon whom  proxies  valid for purposes of the meeting have been
conferred or their duly appointed  substitutes  (if the related proxies confer a
power of substitution);  provided,  however,  that the Board of Directors or the
Chairman of the  meeting  may  establish  rules  limiting  the number of persons
referred  to in  clause  (ii) as being  entitled  to  attend  on  behalf  of any
shareholder so as to preclude such an excessively  large  representation of such
shareholder  at the meeting as, in the  judgment of the Board or such  Chairman,
would be unfair to other  shareholders  represented  at the meeting or be unduly
disruptive  of the orderly  conduct of business at such  meeting  (whether  such
representation would result from fragmentation of the aggregate number of shares
held by such shareholder for the purpose of conferring proxies,  from the naming
of an excessively  large proxy delegation by such shareholder or from employment
of any other  device).  A person  otherwise  entitled to attend any such meeting
will cease to be so entitled if, in the judgment of the Chairman of the meeting,
such person engages thereat in disorderly conduct impeding the proper conduct of
the meeting in the interests of all shareholders as a group.

     2.06.  QUORUM.  Except as otherwise  provided by law, the Articles or these
Bylaws,  at each meeting of  shareholders  the presence in person or by proxy of
the holders of a majority  in voting  power of the  outstanding  shares of stock

                                      -2-
<PAGE>
entitled to vote at the meeting shall be necessary and  sufficient to constitute
a quorum.

     2.07.  ELECTION  INSPECTORS.  The Board of  Directors,  in  advance  of any
shareholders  meeting may appoint an election  inspector or inspectors to act at
such  meeting  (and  any  adjournment  thereof).  If an  election  inspector  or
inspectors  are not so  appointed,  the Chairman of the meeting may or, upon the
request  of  any  person  entitled  to  vote  at the  meeting  will,  make  such
appointment.  If any person appointed as an inspector fails to appear or to act,
a substitute may be appointed by the Chairman of the meeting. If appointed,  the
election  inspector or inspectors (acting through a majority of them if there be
more  than  one)  will   determine  the  number  of  shares   outstanding,   the
authenticity,  validity  and  effect of  proxies,  the  credentials  of  persons
purporting to be  shareholders  or persons named or referred to in proxies,  and
the number of shares  represented  at the  meeting in person and by proxy;  they
will  receive and count  votes,  ballots and  consents  and announce the results
thereof; they will hear and determine all challenges and questions pertaining to
proxies and  voting;  and, in  general,  they will  perform  such acts as may be
proper  to  conduct   elections  and  voting  with  complete   fairness  to  all
shareholders. No such election inspector need be a shareholder of the Company.

     2.08.  ORGANIZATION AND CONDUCT OF MEETINGS. Each shareholders meeting will
be called to order and thereafter  chaired by the Chairman of the Board if there
then is one;  or,  if not,  or if the  Chairman  of the  Board is  absent  or so
requests,  then by the  President;  or if both the Chairman of the Board and the
President  are  unavailable,  then by such other  officer of the Company or such
shareholder as may be appointed by the Board of Directors.  The Secretary (or in
his or her absence an Assistant  Secretary) of the Company will act as secretary
of  each  shareholders  meeting;  if  neither  the  Secretary  nor an  Assistant
Secretary is in  attendance,  the Chairman of the meeting may appoint any person
(whether a  shareholder  or not) to act as secretary  thereat.  After  calling a
meeting to order,  the  Chairman  thereof may require  the  registration  of all
shareholders  intending to vote in person,  and the filing of all proxies,  with
the election inspector or inspectors, if one or more have been appointed (or, if
not,  with the  secretary of the  meeting).  After the  announced  time for such
filing of proxies has ended,  no further  proxies or changes,  substitutions  or
revocations  of proxies will be  accepted.  If  directors  are to be elected,  a
tabulation of the proxies so filed will, if any person  entitled to vote in such
election so requests, be announced at the meeting (or adjournment thereof) prior
to the closing of the election polls.

     Absent a showing of bad faith on his or her part, the Chairman of a meeting
will,  among other  things,  have  absolute  authority to determine the order of
business to be conducted at such meeting and to establish rules for, and appoint
personnel to assist in,  preserving  the orderly  conduct of the business of the
meeting  (including  any informal,  or question and answer,  portions  thereof).
Rules,  regulations  or  procedures  regarding  the conduct of the business of a
meeting, whether adopted by the Board of Directors or prescribed by the Chairman
of the  meeting,  may  include,  without  limitation,  the  following:  (i)  the
establishment of an agenda or order of business for the meeting;  (ii) rules and
procedures for maintaining order at the meeting and the safety of those present;
(iii)   limitations  on  attendance  at  or  participation  in  the  meeting  to
shareholders  of record of the Company,  their duly  authorized and  constituted
proxies  (subject to Section  2.05) or such other persons as the Chairman of the
meeting shall  determine;  (iv)  restrictions  on entry to the meeting after the
time  fixed  for the  commencement  thereof;  and (v)  limitations  on the  time

                                      -3-
<PAGE>
allotted to  questions  or comments  by  participants.  Unless and to the extent
determined by the Board of Directors or the Chairman of the meeting, meetings of
shareholders  shall not be required to be held in  accordance  with the rules of
parliamentary   procedure.  Any  informational  or  other  informal  session  of
shareholders conducted under the auspices of the Company after the conclusion of
or otherwise in conjunction with any formal business meeting of the shareholders
will be chaired by the same  person  who  chairs  the  formal  meeting,  and the
foregoing  authority  on his or her part  will  extend  to the  conduct  of such
informal session.

     2.09.  VOTING.  The number of shares  voted on any matter  submitted to the
shareholders  which is required to constitute  their action  thereon or approval
thereof will be determined in accordance with applicable law, the Articles,  and
these Bylaws, if applicable.  No ballot or change of vote will be accepted after
the polls have been declared  closed  following the ending of the announced time
for voting.

     2.10.  SHAREHOLDER  APPROVAL OR  RATIFICATION.  The Board of Directors  may
submit any contract or act for approval or ratification at any duly  constituted
meeting of the shareholders,  the notice of which either includes mention of the
proposed  submittal  or is waived as provided in Section  2.03 above.  Except as
otherwise  required by law (e.g.,  Arizona Revised Statutes Section 10-863),  if
any  contract or act so  submitted  is approved or ratified by a majority of the
votes cast thereon at such  meeting,  the same will be valid and as binding upon
the Company and all of its  shareholders as it would be if approved and ratified
by each and every shareholder of the Company.

     2.11.  ADJOURNMENTS.  Any meeting of shareholders,  annual or special,  may
adjourn  from time to time to  reconvene  at the same or some other  place,  and
notice  need not be given of any such  adjourned  meeting  if the time and place
thereof are announced at the meeting at which the  adjournment is taken.  At the
adjourned  meeting the Company may transact  any  business  that might have been
transacted  at the original  meeting.  If the  adjournment  is for more than one
hundred and twenty days, or if after the  adjournment a new record date is fixed
for the adjourned  meeting,  notice of the  adjourned  meeting shall be given to
each shareholder of record entitled to vote at the meeting.

     2.12.  SHAREHOLDER  ACTION BY  WRITTEN  CONSENT.  Any  action  required  or
permitted to be taken at a meeting of the  shareholders  may be taken  without a
meeting if one (1) or more  consents  in  writing,  setting  forth the action so
taken, shall be signed by all of the shareholders  entitled to vote with respect
to the subject  matter  thereof.  The consents shall be delivered to the Company
for inclusion in the minutes or filing with the Company's records.  Action taken
by consent is effective when the last shareholder signs the consent,  unless the
consent specifies a different effective date, except that if, by law, the action
to be taken requires that notice be given to  shareholders  who are not entitled
to vote on the matter,  the  effective  date shall not be prior to ten (10) days
after the Company shall give such  shareholders  written  notice of the proposed
action,  which notice shall contain or be  accompanied by the same material that
would have been  required if a formal  meeting  had been called to consider  the
action. A consent signed under this section has the effect of a meeting vote and
may be described as such in any document.

                                      -4-
<PAGE>
                             III. BOARD OF DIRECTORS

     3.01.  MEMBERSHIP AND  QUALIFICATION.  The Board of Directors will have the
exclusive  power to increase or decrease its size within the limits fixed in the
Articles (Art. Fifth). Any vacancy occurring in the Board,  whether by reason of
death,  resignation,  disqualification  or  otherwise,  may  be  filled  by  the
directors as contemplated  by law and as provided in the Articles (Art.  Fifth).
Any such  increase  in the size of the Board,  and the  filling  of any  vacancy
created  thereby,  will require action by a majority of the whole  membership of
the Board as  comprised  immediately  before  such  increase.  A person will not
qualify for  election or  appointment  as a director,  whether  initially  or on
re-election  and whether by the  shareholders  at their annual meeting or by the
Board of Directors as  contemplated  in this Section 3.01, if such person's 70th
birthday occurs on or has occurred before the date of such election, appointment
or re-election. A person who has been a full-time employee of the Company within
twelve months prior to the date of any election will not qualify for election as
a director  on that date unless he or she then  remains a full-time  employee of
the  Company  or  unless  the Board of  Directors  specifically  authorizes  the
election of such person (but it is not intended that any such authorization will
extend a person's  service on the Board beyond the age limitation set out in the
preceding sentence).  A person who has qualified by age or employment status for
his or her most recent election as a director may serve  throughout the term for
which such person was elected, notwithstanding the occurrence of his or her 70th
birthday or cessation of full-time employment by the Company between the date of
such  election  and  the  end of  such  term,  subject,  however,  to his or her
otherwise remaining qualified for such office.

     3.02. REGULAR MEETINGS.  A regular annual meeting of the directors is to be
held as soon as practicable  after the  adjournment of each annual  shareholders
meeting either at the place of the  shareholders  meeting or at such other place
as the directors  elected at the shareholders  meeting may have been informed of
at or before the time of their election. Regular meetings, other than the annual
ones,  may be held at such  intervals  at such  places  and at such times as the
Board of Directors may provide.

     3.03.  SPECIAL MEETINGS.  Special meetings of the Board of Directors may be
held  whenever  and  wherever  called  for by the  Chairman  of the  Board,  the
President  or the number of  directors  which would be required to  constitute a
quorum.

     3.04.  NOTICE.  No notice need be given of regular meetings of the Board of
Directors.  Notice of the time and place (but not necessarily the purpose or all
of the purposes) of any special meeting will be given to each director in person
or  by  telephone,  or  via  mail,  telegram,  facsimile,  or  other  electronic
transmission addressed in the manner appearing on the Company's records.  Notice
to any director of any such special meeting will be deemed given sufficiently in
advance when (i) if given by mail,  the same is  deposited in the United  States
mail at least four days before the meeting date, with postage  thereon  prepaid,
(ii) if given by telegram,  the same is delivered  to the  telegraph  office for
fast transmittal at least 48 hours prior to the convening of the meeting,  (iii)
if given by facsimile or other electronic transmission,  the same is received by
the  director or an adult  member of his or her office  staff or  household,  at
least 24 hours prior to the  convening  of the  meeting,  or (iv) if  personally
delivered or given by telephone, the same is handed, or the substance thereof is
communicated  over the telephone to the director or to an adult member of his or
her office staff or  household,  at least 24 hours prior to the convening of the

                                      -5-
<PAGE>
meeting.  Any such notice may be waived as provided by law. No call or notice of
a meeting of  directors  will be  necessary  if each of them  waives the same in
writing or by attendance.  Any meeting,  once properly called and noticed (or as
to which call and notice have been waived as aforesaid) and at which a quorum is
formed,  may be  adjourned  to another  time and place by a majority of those in
attendance.

     3.05.  QUORUM;  VOTING.  A quorum for the  transaction  of  business at any
meeting or  adjourned  meeting of the  directors  will  consist of a majority of
those then in office. Any matter submitted to a meeting of the directors will be
resolved by a majority of the votes cast thereon,  except as otherwise  required
by these Bylaws (ss. 3.01 above and ss. 3.06 below), by law or by any applicable
Article.  However,  in case of an equality of votes, the Chairman of the meeting
will have a second or  deciding  vote.  Where  action by a majority of the whole
membership is required,  such requirement will be deemed to relate to a majority
of the  directors in office at the time the action is taken.  In  computing  any
such majority,  whether for purposes of determining  the presence of a quorum or
the adequacy of the vote on any proposed action,  any unfilled  vacancies at the
time  existing  in the  membership  of the  Board  will  be  excluded  from  the
computation.

     3.06.  EXECUTIVE  COMMITTEE.  The Board of  Directors  may,  by  resolution
adopted by a majority of the whole  Board,  name three or more of its members as
an Executive Committee.  Such Executive Committee will have and may exercise the
powers of the Board of Directors in the  management  of the business and affairs
of the Company  while the Board is not in session,  except only as  precluded by
law or where  action  other than by a majority  of the votes cast is required by
these Bylaws, or the law (all as referred to in Section 3.05 above), and subject
to such limitations as may be included in any applicable  resolution passed by a
majority of the whole  membership of the Board. A majority of those named to the
Executive Committee will constitute a quorum.

     3.07.  OTHER  COMMITTEES.  The Board of Directors may designate one or more
additional committees, each committee to consist of one or more of the directors
of the Company.  The Board of Directors may  designate one or more  directors as
alternate  members of any committee,  who may replace any absent or disqualified
member at any  meeting  of the  committee.  Any such  committee,  to the  extent
permitted by law and to the extent  provided in the  resolution  of the Board of
Directors, shall have and may exercise all the powers and authority of the Board
of Directors in the  management of the business and affairs of the Company,  and
may  authorize  the seal of the  Company to be  affixed  to all papers  that may
require it.

     3.08.  COMMITTEE  FUNCTIONING.  Notice  requirements  (and  related  waiver
provisions) for meetings of the Executive  Committee and other committees of the
Board will be the same as those set forth in Section  3.04 above for meetings of
the Board of Directors. Except as provided in the next two succeeding sentences,
a majority of those named to the Executive  Committee or any other  committee of
the Board will  constitute a quorum at any meeting  thereof  (with the effect of
departure of committee  members from a meeting and the computation of a majority
of committee members to be in accordance with the applicable policies of Section
3.05 above), and any matter submitted to a meeting of any such committee will be
resolved by a majority of the votes cast thereon.  No  distinction  will be made
among  ex-officio or other members of any such  committee for quorum,  voting or
other  purposes,  except that the  membership  of any committee  (including  the

                                      -6-
<PAGE>
Executive  Committee),  in  performing  any  function  vested  in it  as  herein
contemplated,  may be deemed to exclude any officer or employee of the  Company,
in either case, or other person,  having a direct or indirect  personal interest
in any proposed  exercise of such function,  whose exclusion for that purpose is
deemed  appropriate  by a  majority  of the  other  members  of  such  committee
proposing to perform such function.  All committees are to keep regular  minutes
of the transactions of their meetings.

     3.09.  ACTION BY  TELEPHONE  OR  CONSENT.  Any  meeting of the Board or any
committee thereof may be held by conference telephone or similar  communications
equipment as permitted by law in which case any required  notice of such meeting
may generally describe the arrangements  (rather than the place) for the holding
thereof,  and all other provisions herein contained or referred to will apply to
such meeting as though it were  physically  held at a single  place.  Action may
also be taken by the Board or any  committee  thereof  without a meeting  if the
members thereof consent in writing thereto as contemplated by law.

     3.10.  PRESUMPTION OF ASSENT. A director of the Company who is present at a
meeting of the Board of Directors,  or of any committee when corporate action is
taken is deemed to have  assented  to the  action  taken  unless  either (i) the
director  objects at the beginning of the meeting or promptly on the  director's
arrival  to  holding  it or  transacting  business  at  the  meeting;  (ii)  the
director's dissent or abstention from the action taken is entered in the minutes
of the meeting;  or (iii) the director delivers written notice of the director's
dissent  or  abstention  to the  presiding  officer  of the  meeting  before its
adjournment  or to the Company  before 5:00 P.M. on the next  business day after
the meeting.  The right of dissent or  abstention is not available to a director
who votes in favor of the action taken.

     3.11.  COMPENSATION.  By resolution of the Board, the directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors,
or of any  committee,  and may be paid a fixed sum for  attendance  at each such
meeting  and/or a stated  salary as a  director  or  committee  member.  No such
payment  will  preclude  any  director  from  serving  the  Company in any other
capacity and receiving compensation therefor.

     3.12. REMOVAL. Any director or the entire Board of Directors may be removed
with or without cause, only at a special meeting of shareholders called for that
purpose,  by the affirmative vote of sixty-six and two-thirds  percent (66 2/3%)
of the  issued and  outstanding  shares of stock  then  entitled  to vote on the
election of directors, except that if less than the entire Board of Directors is
to be removed,  no one of the directors may be removed if the votes cast against
the  director's  removal  would be  sufficient  to elect  the  director  if then
cumulatively  voted at an  election  for the  class of  directors  of which  the
director is a part.

                             IV. OFFICERS - GENERAL

     4.01. ELECTIONS AND APPOINTMENTS. The directors may elect or appoint one or
more of the  officers  of the  Company  contemplated  in Part V below.  Any such
election or  appointment  will regularly take place at the annual meeting of the
directors,  but  elections of officers  may be held at any other  meeting of the
Board.  A person  elected or appointed to any office will  continue to hold that
office until the election or  appointment  of his or her  successor,  subject to
action earlier taken pursuant to Section 4.04 or 6.01 below. Any person may hold
more than one office.

                                      -7-
<PAGE>
     4.02. ADDITIONAL APPOINTMENTS.  In addition to the officers contemplated in
Part V below, the Board of Directors may create other corporate  positions,  and
appoint  persons  thereto,  with such authority to perform such duties as may be
prescribed  from time to time by the Board of Directors,  by the President or by
the superior officer of any person so appointed. Notwithstanding such additional
appointments, only those persons whose offices are described in Part V are to be
considered an officer of the Company unless the resolution or other Board action
appointing such person  expressly states that such person is to be considered an
officer of the  Company.  Each of such persons (in the order  designated  by the
Board or the  superior  officer of such  person)  will be vested with all of the
powers and charged with all of the duties of his or her superior  officer in the
event of such superior officer's absence or disability.

     4.03. BONDS AND OTHER REQUIREMENTS.  The Board of Directors may require any
officer or other appointee to give bond to the Company (with sufficient  surety,
and conditioned upon the faithful performance of the duties of his or her office
or position)  and to comply with such other  conditions as may from time to time
be required of him or her by the Board.

     4.04.  REMOVAL  OR  DELEGATION.  Provided  that a  majority  of  the  whole
membership  thereof  concurs  therein,  the Board of  Directors  may  remove any
officer  of the  Company as  provided  by law and  declare  his or her office or
offices  vacant or abolished or, in the case of the absence or disability of any
officer or for any other reason considered sufficient,  may temporarily delegate
his or her powers and duties to any other  officer or to any  director.  Similar
action may be taken by the Board of Directors in regard to appointees designated
pursuant to Section 4.02 above.

     4.05.  SALARIES.  Officer  salaries  may from  time to time be fixed by the
Board of Directors or (except as to his or her own) be left to the discretion of
the Chief Executive Officer or the President.  No officer will be prevented from
receiving  a salary by reason of the fact that he or she is also a  director  of
the Company.

                   V. SPECIFIC OFFICERS, FUNCTIONS AND POWERS

     5.01. CHAIRMAN OF THE BOARD. The Board of Directors may elect a Chairman to
serve as a  general  executive  officer  of the  Company  and,  if  specifically
designated as such by the Board, as the Chief Executive  Officer of the Company.
If elected,  the Chairman  will preside at all meetings of the  directors and be
vested  with such  other  powers  and  duties as the Board may from time to time
delegate to him or her.

     5.02.  CHIEF  EXECUTIVE  OFFICER.  Subject  to the  control of the Board of
Directors exercised as hereinafter provided,  the Chief Executive Officer of the
Company will  supervise  its business and affairs and the  performance  of their
respective duties by all other officers,  by appointees  designated  pursuant to
Section  4.02  above,  and by such  additional  appointees  to  such  additional
positions  (corporate,  divisional or otherwise) as the Chief Executive  Officer
may designate,  with authority on his or her part to delegate the foregoing duty
of supervision to such extent and to such person or persons as may be determined
by the Chief Executive Officer.  Except as otherwise indicated from time to time
by  resolution  of the Board of  Directors,  its  management of the business and
affairs  of the  Company  will be  implemented  through  the office of the Chief
Executive Officer.

                                      -8-
<PAGE>
     5.03.  PRESIDENT AND VICE  PRESIDENTS.  Unless specified to the contrary by
resolution of the Board of Directors,  the President will be the Chief Executive
Officer of the Company. In addition to the supervisory functions above set forth
on the part of the Chief  Executive  Officer  or in lieu  thereof  if a contrary
specification is made by the Board relative to the Chief Executive Officer,  the
President  will be vested with such powers and duties as the Board may from time
to time  designate.  Vice Presidents may be elected by the Board of Directors to
perform  such  duties  as may be  designated  by the  Board  or be  assigned  or
delegated to them by their respective superior officers.  The Board may identify
(i) one or more Vice  Presidents as "Executive" or "Senior" Vice  Presidents and
(ii) the President or any Vice President as "General Manager" of the Company and
the title of any Vice  President  may  include  words  indicative  of his or her
particular area of responsibility and authority. Vice Presidents will succeed to
the responsibilities and authority of the President,  in the event of his or her
absence or disability,  in the order consistent with their respective  titles or
regular duties or as specifically designated by the Board of Directors.

     5.04.  TREASURER AND  SECRETARY.  The  Treasurer  and  Secretary  each will
perform all such duties normally  associated with his or her office  (including,
in the case of the  Secretary,  the  giving of notice  and the  preparation  and
retention  of minutes of  corporate  proceedings  and the  custody of  corporate
records and the seal of the Company) as are not assigned to a Vice  President of
the Company,  along with such other duties as may be  designated by the Board or
be assigned or  delegated to them by their  respective  superior  officers.  The
Board may appoint one or more  Assistant  Treasurers  or Assistant  Secretaries,
each of whom (in the order designated by the Board or their respective  superior
officers)  will be vested  with all of the  powers and  charged  with all of the
duties of the  Treasurer or the  Secretary  (as the case may be) in the event of
his or her absence or disability.

     5.05. SPECIFIC POWERS.  Except as may otherwise be specifically provided in
a resolution of the Board of Directors,  any of the officers referred to in this
Part V will be a proper  officer to  authenticate  records of the Company and to
sign on  behalf  of the  Company  any deed,  bill of sale,  assignment,  option,
mortgage, pledge, note, bond, debenture, evidence of indebtedness,  application,
consent  (to service of process or  otherwise),  agreement,  indenture  or other
instrument  of  importance  to the Company.  Any such officer may  represent the
Company at any  meeting  of the  shareholders  or  members  of any  corporation,
association,  partnership,  joint  venture or other entity in which this Company
then has an interest, and may vote such interest in person or by proxy appointed
by him or her, provided that the Board of Directors may from time to time confer
the foregoing authority upon any other person or persons.

                         VI. RESIGNATIONS AND VACANCIES

     6.01.  RESIGNATIONS.  Any director,  committee member or officer may resign
from his or her office at any time by written  notice as specified in accordance
with Arizona Revised  Statutes  Sections 10-807 and 10-843.  The acceptance of a
resignation will not be required to make it effective.

     6.02. VACANCIES. If the office of any director, committee member or officer
becomes  vacant by reason of his or her  death,  resignation,  disqualification,
removal or  otherwise,  the Board of  Directors  may choose a successor  to hold
office for the unexpired term.

                                      -9-
<PAGE>
                      VII. INDEMNIFICATION AND RATIFICATION

     7.01.  INDEMNIFICATION.  In order to induce qualified  persons to serve the
Company (and any other corporation,  joint venture, partnership,  trust or other
enterprise at the request of the Company) as directors and officers, the Company
shall indemnify any and all of its directors and officers,  or former  directors
and officers to the fullest  extent  permitted by applicable law as it presently
exists or may hereafter be amended.

     7.02.  RATIFICATION;  SPECIAL  COMMITTEE.  Any  transaction  involving  the
Company, any of its subsidiary  corporations or any of its directors,  officers,
employees  or agents  which at any time is  questioned  in any manner or context
(including a shareholders  derivative suit), on the ground of lack of authority,
conflict  of  interest,   misleading  or  omitted  statement  of  fact  or  law,
nondisclosure,  miscomputation,  improper principles or practices of accounting,
inadequate records,  defective or irregular execution or any similar ground, may
be investigated  and/or ratified (before or after judgment),  or an election may
be made not to  institute  or  pursue a claim or legal  proceedings  on  account
thereof or to accept or approve a negotiated  settlement  with  respect  thereto
(before  or  after  the  institution  of  legal  proceedings),  by the  Board of
Directors  or  by  a  special   committee  thereof  comprised  of  one  or  more
disinterested   directors  (that  is,  a  director  or  directors  who  did  not
participate  in  the  questioned   transaction  with  actual  knowledge  of  the
questioned aspect or aspects  thereof).  Such a special committee may be validly
formed and fully  empowered to act, in  accordance  with the purposes and duties
assigned  thereto,  by  resolution  or  resolutions  of the Board of  Directors,
notwithstanding  (i) the inclusion of Board members who are not disinterested as
aforesaid  among those who form a quorum at the meeting or meetings at which one
or more members of such special  committee are elected or appointed to the Board
or to such special  committee or at which such committee is formed or empowered,
or their inclusion among the directors who vote upon or otherwise participate in
taking any of the foregoing  actions,  or (ii) the taking of any of such actions
by the disinterested  members of the Board (or a majority of such members) whose
number is not  sufficient to constitute a quorum or a majority of the membership
of the full Board.  Any such special  committee so comprised  will,  to the full
extent  consistent  with its purposes and duties as expressed in such resolution
or  resolutions,  have all of the authority and powers of the full Board and its
Executive  Committee  (the  same as  though it were the full  Board  and/or  its
Executive  Committee in carrying out such purposes and duties) and will function
in accordance with Section 3.08 above. No other provisions of these Bylaws which
may at any time appear to conflict with any provisions of this Section 7.02, and
no defect or  irregularity  in the  formation,  empowering or functioning of any
such special committee,  will serve to impede, impair or bring into question any
action taken or  purported to be taken by such  committee or the validity of any
such action.  Any  ratification  of a transaction  pursuant to this Section 7.02
will  have the  same  force  and  effect  as if the  transaction  has been  duly
authorized originally. Any such ratification,  and any election made pursuant to
this Section 7.02 with respect to claims, legal proceedings or settlements, will
be binding upon the Company and its  shareholders  and will  constitute a bar to
any  claim or the  execution  of any  judgment  in  respect  of the  transaction
involved in such ratification or election.

                                   VIII. SEAL

     8.01. FORM THEREOF. The seal of the Company will have inscribed thereon the
name of the  Company,  the  state  and year of its  incorporation  and the words
"SEAL".

                                      -10-
<PAGE>
                             IX. STOCK CERTIFICATES

     9.01. FORM THEREOF. Each certificate representing stock of the Company will
be in such form  conforming  to law as may from time to time be  approved by the
Board of Directors,  and will bear the manual  facsimile  signatures and seal of
the Company as required or permitted by law.

     9.02. OWNERSHIP. The Company will be entitled to treat the registered owner
of any share as the absolute owner thereof and accordingly, will not be bound to
recognize  any  beneficial,  equitable  or other claim to, or interest  in, such
share on the part of any other  person,  whether or not it has  notice  thereof,
except as may  expressly be provided by Chapter 8 of Title 47,  Arizona  Revised
Statutes (or its successor), as at the time in effect, or other applicable law.

     9.03. TRANSFERS. Transfer of stock will be made on the books of the Company
only upon surrender of the certificate therefor, duly endorsed by an appropriate
person,  with  such  assurance  of  the  genuineness  and  effectiveness  of the
endorsement  as the Company may  require,  all as  contemplated  by Chapter 8 of
Title 47, Arizona Revised Statutes (or its successor), as at the time in effect,
and/or upon  submission  of any  affidavit,  other  document or notice which the
Company considers necessary.

     9.04. LOST CERTIFICATES.  In the event of the loss, theft or destruction of
any  certificate  representing  capital stock of this  Company,  the Company may
issue (or,  in the case of any such stock as to which a  transfer  agent  and/or
registrar have been appointed,  may direct such transfer agent and/or  registrar
to  countersign,  register and issue) a replacement  certificate in lieu of that
alleged to be lost,  stolen or destroyed,  and cause the same to be delivered to
the owner of the stock represented  thereby,  provided that the owner shall have
submitted such evidence showing the  circumstances of the alleged loss, theft or
destruction,  and  his  or  her  ownership  of the  certificate  as the  Company
considers  satisfactory,  together  with any other  factors  which  the  Company
considers  pertinent,  and further  provided that an indemnity  agreement and/or
indemnity bond shall have been provided in form and amount  satisfactory  to the
Company and to its transfer agent and/or registrar, if applicable.

                               X. EMERGENCY BYLAWS

     10.01.  EMERGENCY CONDITIONS.  The emergency Bylaws provided in this Part X
will be effective in the event of an emergency as prescribed in Arizona  Revised
Statutes Section 10-207.D. To the extent not inconsistent with the provisions of
this Part X, these Bylaws will remain in effect  during such  emergency and upon
its termination these emergency Bylaws will cease to be operative.

     10.02. BOARD MEETINGS. During any such emergency, a meeting of the Board of
Directors or any of its  committees  may be called by any officer or director of
the  Company.  Notice of the time and place of the meeting  will be given by the
person  calling  the same to those of the  directors  whom it may be feasible to
reach by any available means of communication. Such notice will be given so much
in advance of the meeting as circumstances  permit in the judgment of the person
calling  the same.  At any  Board or  committee  meeting  held  during  any such
emergency,  a quorum will consist of a majority of those who could reasonably be
expected  to attend the  meeting if they were  willing to do so, but in no event

                                      -11-
<PAGE>
more than a majority of those to whom notice of such meeting is required to have
been given as above provided.

     10.03. CERTAIN ACTIONS. The Board of Directors, either before or during any
such emergency,  may provide and from time to time modify lines of succession in
the  event  that  during  such an  emergency  any or all  officers,  appointees,
employees  or agents of the Company  are for any reason  rendered  incapable  of
discharging their duties. The Board, either before or during any such emergency,
may,  effective in the  emergency,  change the head office or designate  several
alternative head offices of the Company, or authorize the officers to do so.

     10.04. LIABILITY. No director, officer, appointee, employee or agent acting
in  accordance  with these  emergency  Bylaws will be liable  except for willful
misconduct.

     10.05.  MODIFICATIONS.  These emergency Bylaws will be subject to repeal or
change by further action of the Board of Directors, but no such repeal or change
will modify the  provisions  of Section 10.04 with respect to action taken prior
to the time of such repeal or change.  Any amendment of these  emergency  Bylaws
may make any further or different provisions that may be practical and necessary
for the circumstances of the emergency.

                                  XI. DIVIDENDS

     11.01. DECLARATION.  Subject to such restrictions or requirements as may be
imposed by law or the Company's Articles or as may otherwise be binding upon the
Company, the Board of Directors may from time to time declare dividends on stock
of the Company outstanding on the dates of record fixed by the Board, to be paid
in cash,  in  property  or in  shares  of the  Company's  stock on or as of such
payment or distribution dates as the Board may prescribe.

                                 XII. AMENDMENTS

     12.01. PROCEDURE.  These Bylaws may be amended,  supplemented,  repealed or
temporarily or permanently suspended,  in whole or in part, or new bylaws may be
adopted, at any duly constituted  meeting of the Board of Directors,  the notice
of which meeting either includes  mention of the proposed action relative to the
Bylaws or is waived as provided in Section 3.04 above. If, however, the chairman
of any such  meeting or a majority of directors  in  attendance  thereat in good
faith determines that any such action has arisen as a matter of necessity at the
meeting and is otherwise proper, no notice of such action will be required.

     12.02.  AMENDMENT OF BYLAWS.  Notwithstanding  any other provision of these
Bylaws,  Sections 2.02, 3.01, and 3.12 and Article XII of these Bylaws shall not
be altered,  amended,  supplemented,  repealed,  or  temporarily  or permanently
suspended, in whole or in part, or replacement Bylaw provisions adopted without:
(i) the affirmative vote of a majority of the directors then in office; and (ii)
the affirmative  vote of  seventy-five  percent (75%) or more of the outstanding
shares of the Company entitled to vote generally.

                                      -12-
<PAGE>
                                   CERTIFICATE

     I, FAYE  WIDENMANN,  Vice President and Secretary of ARIZONA PUBLIC SERVICE
COMPANY, an Arizona corporation,  do HEREBY CERTIFY that the foregoing is a true
and correct copy of the Company's  Bylaws,  as amended and that such Bylaws,  as
amended, are in full force and effect as of the date hereof.

     IN WITNESS  WHEREOF,  I have  hereunto  set my hand and affixed the seal of
said corporation as of this 18th day of September, 2002.

                                        Faye Widenmann
                                        ----------------------------------------
                                        FAYE WIDENMANN
                                        Vice President and Secretary

                                      -13-

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>5
<FILENAME>ex10-1.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - LEVINE
<TEXT>
                                                                    Exhibit 10.1

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT executed this 11 day of October, 2002, and
effective as of October 1, 2002, by and between ARIZONA PUBLIC SERVICE COMPANY,
an Arizona corporation (hereinafter referred to as the "Company" or "Employer")
and JAMES M. LEVINE (hereinafter referred to as the "Employee");

                                    RECITALS

     A.   The Company  desires to employ  Employee in the  position of Executive
          Vice President APS Generation.

     B.   The  Company  desires to insure,  insofar  as  possible,  that it will
          continue  to have the  benefit  of the  Employee's  services  over the
          Employment Term and to protect its  confidential  information and good
          will.

     C.   Employer is engaged in the business of generation,  construction,  and
          acquisition of electrical power, and the transmission and distribution
          of electrical power.

     NOW,  THEREFORE,  in  consideration  of the  foregoing  and  of the  mutual
covenants and agreements  hereinafter  set forth,  the parties  hereto  mutually
covenant and agree as follows:

                                   AGREEMENTS

     1. TITLE.  The Company does hereby  employ the  Employee as Executive  Vice
President APS Generation,  and the Employee does hereby accept and agree to such
employment.

     2. EMPLOYMENT TERM.

     (a) The Employee shall be employed by the Company in the position set forth
in Section 1 for a five (5) year period commencing on October 1, 2002 and ending
on October 1, 2007 (the "Employment Term").

     (b) The parties may renew this Employment  Agreement for additional periods
on mutually  acceptable  terms and  conditions,  but neither the Company nor the
Employee is under any obligation to agree to such extensions.

     (c) In the event of a "Change of Control" [as defined in the Employee's Key
Executive  Employment  Severance Agreement ("KEESA")] the terms of the KEESA are
controlling.

     3.  COMPENSATION.  Employer  agrees to pay Employee an annual salary in the
amount of $550,000.00.

     4. BONUSES AND OTHER COMPENSATION.

     All incentive  plans are subject to change or  termination  at the Board of
Director's sole discretion.
<PAGE>
     (a) INCENTIVE PAY.  Employer agrees to award Employee an incentive bonus of
up to 60% of base  salary with a target  level of 40% of base  salary  under the
Officer  Incentive Plan if corporate,  departmental  and individual  targets are
met, all in accordance with the terms of that Plan.

     (b)  PERFORMANCE  SHARES AND STOCK OPTIONS.  Employer agrees to request the
Human Resources Committee ("the Committee") to grant Employee Performance Shares
in an amount  equivalent  to 65% - 85% of the amount  awarded to a member of the
Office of the President under the Stock Incentive Plan. The Employer also agrees
to request the Committee to grant  Performance  Accelerated  Stock Options under
the Stock  Incentive Plan equal to five times the number of  Performance  Shares
granted under this Paragraph (b).

     (c)  ADDITIONAL  PERFORMANCE  SHARES.  In addition  to (b) above,  Employer
agrees to request the Committee to grant Employee 2000  Performance  Shares each
year under the 2002 Stock  Incentive Plan (the "2002 Plan") without any matching
requirement, all in accordance with the terms of the 2002 Plan and as previously
agreed upon by the parties.

     (d) PENSION.  Employee's  pension  benefit  that was agreed upon  effective
January 1, 2002 will remain the same.

     (e) OTHER PAYMENTS.

          i.  Employee is eligible for  incentive  payments  based on Palo Verde
     Nuclear  Generating  Station  maintenance of specified  federal and nuclear
     oversight  program  ratings,  nuclear  safety,  and for  successful  outage
     results.

          ii.  The  Company  agrees to pay for a  Country  Club  membership  for
     Employee's  use. The Company will purchase the membership and Employee will
     assume payment of the monthly dues.

     5. BENEFITS AND OBLIGATIONS.

     (a) The  Employee  shall be included to the extent  eligible in any and all
plans providing  general benefits to the Company's  employees and which shall be
made  available  on the same  terms  and  conditions  as to other  employees  of
comparable status and position.

     (b) The Employee agrees that if, during the Employment  Period, the Company
terminates his employment or he voluntarily quits, the Employee shall not, for a
period  commencing on the date of termination and ending after one (1) year, (i)
directly own, manage, operate, control, be employed by, participate in, finance,
consult,  advise,  or be connected in any manner  whatsoever with the ownership,
management,   operation,   control  or  financing  of  any   business,   person,
corporation,  partnership,  or other entity which directly or indirectly engages
in electric power generation, in competition with the Company, or (ii) engage in
any other  activity  involving  competition  with the  Company in the  foregoing
industry without the prior written approval of the Company's Board of Directors;
provided, however, that nothing in this Section shall prohibit the Employee from
owning stock or other  securities of a competitor  amounting to less than twenty

                                       2
<PAGE>
percent  (20%) of the stated  capital of such  competitor.  For purposes of this
provision,  if a Court of competent jurisdiction should rule that a one (1) year
period is unenforceable then the period shall be six (6) months.

     (c) The Employee covenants and agrees,  during the Employee's employment by
the Company and following his Termination Date, to hold in strict confidence any
and all  information in the Employee's  possession as a result of the Employee's
employment;  provided  that  nothing  in  this  Employment  Agreement  shall  be
construed to prohibit the Employee from  reporting or  disclosing  any suspected
instance of illegal  activity of any nature,  any nuclear safety  concerns,  any
workplace  safety  concerns or any public  safety  concerns to the United States
Nuclear  Regulatory  Commission  ("NRC"),  United  States  Department  of  Labor
("DOL"),  or any federal,  state, or local  governmental  agency or court.  This
Employment  Agreement  shall not be  construed  to prohibit  the  Employee  from
providing   information  to  the  NRC,  DOL,  or  any  other  federal  or  state
governmental  agency or  governmental  officials,  or testifying in any civil or
criminal  proceedings,  even if such  information  or testimony  being  provided
relates to the claims or matters  covered  by this  Employment  Agreement.  This
Employment  Agreement  shall not be construed as a waiver or  withdrawal  of any
safety  concerns  which  Employee has or may have reported to the NRC or DOL, or
withdrawal  of any  participation  by  Employee  in any NRC or DOL  proceedings.
Notwithstanding  anything to the  contrary in this  paragraph,  Employee  hereby
waives and  releases  any right to receive any relief as a result of  Employee's
participation  in any  investigation  or  proceeding  of the  NRC,  DOL,  or any
federal, state or local government agency or court.

     6. TERMINATION.  This Employment Agreement shall automatically terminate on
the expiration of the initial  Employment Term described in Section 2(a) without
any notice from either party,  unless the parties  mutually agree to extend this
Employment  Agreement  in writing for  additional  periods of time.  The Company
retains the right to terminate this Agreement for cause at any time prior to the
expiration of the Employment Term.

     7. ARBITRATION.  All claims, disputes and other matters in question between
the parties  arising under this Employment  Agreement,  other than Sections 5(b)
and (c) which may be enforced by the Company through injunctive relief, shall be
decided by arbitration in accordance with the rules of the American  Arbitration
Association, unless the parties mutually agree otherwise. Such arbitration shall
take  place  in  Phoenix,  Arizona.  The  Company  shall  pay  the  cost of such
arbitration.  The award by the  arbitrator  shall be final,  and judgment may be
entered upon it in accordance  with applicable law in any state or Federal court
having jurisdiction thereof.

     8.  SEVERABILITY.  In the  event  that a court  of  competent  jurisdiction
determines that any portion of this Employment  Agreement is in violation of any
statute or public policy,  then only the portions of this  Employment  Agreement
which violate such statute or public  policy shall be stricken.  All portions of
this  Employment  Agreement  which do not violate  any statute or public  policy
shall continue in full force and effect.  Further,  any court order striking any
portion of this Employment Agreement shall modify the stricken terms as narrowly
as possible to give as much effect as possible to the  intentions of the parties
under this Employment Agreement.

                                       3
<PAGE>
     9.  GOVERNING  LAW.  This  Employment  Agreement  shall be  governed in all
respects,  whether  as to  validity,  construction,  capacity,  performance,  or
otherwise,  by the laws of the State of Arizona,  and no action  involving  this
Employment  Agreement may be brought  except in the Superior Court for the State
of Arizona or the Federal District Court for the District of Arizona, subject to
Section 7.

     10.  AMENDMENT OR  TERMINATION.  This  Employment  Agreement  and the KEESA
embody the entire  agreement of the parties  respecting  the matters  within its
scope and may be modified only in writing.

     11.  ASSIGNMENT.  This  Agreement  may be assigned by Employer and shall be
fully binding on any such assignee and shall not be assignable by Employee.

     IN WITNESS WHEREOF, the parties have executed this Agreement.


                                   ARIZONA PUBLIC SERVICE COMPANY


                                   By: William J. Post
                                       -----------------------------------------
                                       William J. Post
                                       Pinnacle West Capital Corporation
                                       Its Chief Executive Officer and
                                           Chairman of the Board
                                       Date: 10-11-02
                                             -----------------------------------


                                   EMPLOYEE
                                            James M. Levine
                                            ------------------------------------
                                            James M. Levine
                                            Date: 10-11-02
                                                  ------------------------------

                                       4

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.1
<SEQUENCE>6
<FILENAME>ex12-1.txt
<DESCRIPTION>RATION OF EARNINGS TO FIXED CHARGES
<TEXT>
                                                                    EXHIBIT 12.1

                        PINNACLE WEST CAPITAL CORPORATION
                    COMPUTATION OF EARNINGS TO FIXED CHARGES
                             (THOUSANDS OF DOLLARS)


<TABLE>
<CAPTION>
                                   Nine Months
                                      Ended
                                     9/30/02      2001       2000       1999       1998       1997
                                     --------   --------   --------   --------   --------   --------
<S>                                  <C>        <C>        <C>        <C>        <C>        <C>
Earnings:
  Income from Continuing
    Operations ...................   $230,038   $327,367   $302,332   $269,772   $242,892   $235,856
  Income Taxes ...................    150,656    213,535    194,200    141,592    138,589    126,943
  Fixed Charges ..................    165,416    211,958    202,804    194,070    201,184    215,201
                                     --------   --------   --------   --------   --------   --------
    Total ........................    546,110    752,860    699,336    605,434    582,665    578,000
                                     ========   ========   ========   ========   ========   ========

Fixed Charges:
  Interest Expense ...............    141,149    175,822    166,447    157,142    163,975    177,383
  Estimated Interest Portion of
    Annual Rents .................     24,267     36,136     36,357     36,928     37,209     37,818
                                     --------   --------   --------   --------   --------   --------
    Total Fixed Charges ..........    165,416    211,958    202,804    194,070    201,184    215,201
                                     ========   ========   ========   ========   ========   ========

Ratio of Earnings to Fixed Charges
  (rounded down) .................       3.30       3.55       3.44       3.11       2.89       2.68
                                     ========   ========   ========   ========   ========   ========
</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>7
<FILENAME>ex99-1.txt
<DESCRIPTION>SECTION 906 CERTIFICATION - POST
<TEXT>
                                                                    Exhibit 99.1

 FORM OF CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
                                (WILLIAM J. POST)

     I, William J. Post, the Chairman of the Board and Chief Executive Officer
of Pinnacle West Capital Corporation ("Pinnacle West"), certify, to the best of
my knowledge, that: (a) the attached Quarterly Report on Form 10-Q of Pinnacle
West for the quarterly period ended September 30, 2002 (the "September 2002 Form
10-Q") fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (b) the information contained in the
September 2002 Form 10-Q Report fairly presents, in all material respects, the
financial condition and results of operations of Pinnacle West.


                                        William J. Post
                                        ----------------------------------------
                                        William J. Post
                                        Chairman of the Board and Chief
                                        Executive Officer

                                        Date: November 14, 2002

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>8
<FILENAME>ex99-2.txt
<DESCRIPTION>SECTION 906 CERTIFICATION - PALMERI
<TEXT>
                                                                    Exhibit 99.2

 FORM OF CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
                              (MICHAEL V. PALMERI)

     I, Michael V. Palmeri, Vice President, Finance, of Pinnacle West Capital
Corporation ("Pinnacle West"), certify, to the best of my knowledge, that: (a)
the attached Quarterly Report on Form 10-Q of Pinnacle West for the quarterly
period ended September 30, 2002 (the "September 2002 Form 10-Q") fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and (b) the information contained in the September 2002 Form 10-Q Report
fairly presents, in all material respects, the financial condition and results
of operations of Pinnacle West.


                                        Michael V. Palmeri
                                        ----------------------------------------
                                        Michael V. Palmeri
                                        Vice President, Finance

                                        Date: November 14, 2002

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>9
<FILENAME>ex99-3.txt
<DESCRIPTION>PINNACLE WEST RISK FACTORS
<TEXT>
                                                                    Exhibit 99.3

                                  RISK FACTORS

     THE DEBT SECURITIES WILL BE STRUCTURALLY SUBORDINATED TO THE DEBT
SECURITIES AND OTHER OBLIGATIONS OF OUR SUBSIDIARIES.

     Because we are structured as a holding company, all existing and future
debt and other liabilities of our subsidiaries will be effectively senior in
right of payment to our debt securities. Neither of the indentures under which
we may issue debt securities limits our ability or the ability of our
subsidiaries to incur additional debt in the future. The assets and cash flows
of our subsidiaries will be available, in the first instance, to service their
own debt and other obligations. Our ability to have the benefit of their assets
and cash flows, particularly in the case of any insolvency or financial distress
affecting our subsidiaries, would arise only through our equity ownership
interests in our subsidiaries and only after their creditors have been
satisfied.

     THE CONSTRUCTION COSTS OF THE GENERATION FACILITIES OF PINNACLE WEST ENERGY
CORPORATION ("PINNACLE WEST ENERGY") COULD NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS.

     Pinnacle West Energy, another one of our wholly-owned subsidiaries, has
completed or has under construction about 1,700 MW of natural gas-fired
generating capacity at an estimated cost of about $1 billion. In addition,
Pinnacle West Energy has begun construction of the 570 MW Silverhawk plant in
Nevada at an estimated cost of approximately $400 million. Finally, Pinnacle
West Energy has announced plans to build approximately 1,000 MW of capacity at
Redhawk Units 3 and 4 at an estimated cost of approximately $500 million. The
Company is evaluating whether to construct Redhawk Units 3. Pinnacle West Energy
has procured four gas turbines for Redhawk Units 3 and 4. The cancellation cost
for these turbines is approximately $50 million until September 2003. Pinnacle
West Energy's expansion plans will be sized to meet cash flow and market
conditions.

     Pinnacle West Energy is currently funding its capital requirements through
capital infusions from us. We finance those infusions through debt financings
and internally generated cash. We financed Pinnacle West Energy's generation
expansion program premised upon Pinnacle West Energy's receipt of APS'
generation assets by the end of 2002, as previously required by the Arizona
Corporation Commission's ("ACC") electric competition rules and the 1999
settlement agreement. As a result of recent ACC actions prohibiting APS from
transferring its generation assets, APS filed an application with the ACC
requesting the ACC to allow APS to borrow up to $500 million and to lend the
proceeds to Pinnacle West Energy or to us; to guarantee up to $500 million of
Pinnacle West Energy's or our debt, or a combination of both, not to exceed $500
million in the aggregate. On November 8, 2002 APS filed an Interim Financing
Application with the ACC requesting the ACC to permit APS to (a) make short-term
advances to Pinnacle West in the form of an inter-affiliate line of credit in
the amount of $125 million or (b) gurantee $125 million of Pinnacle West's
short-term debt.

     The ACC's reversal of the generation asset transfer requirement results in
Pinnacle West Energy being unable to obtain investment grade credit ratings.
This, in turn, precludes Pinnacle West Energy from accessing capital markets to
refinance the bridge financing provided by us to fund the construction of
Pinnacle West Energy generation assets or from effectively competing in the
wholesale markets. Our credit ratings could be adversely affected if Pinnacle
West Energy is unable to finance its capital requirements. On November 4, 2002
Standard and Poor's Corporation lowered the Company's senior unsecured debt
rating from BBB to BBB-. See the following two Risk Factors.

                                       1
<PAGE>
     IF WE ARE NOT ABLE TO ACCESS CAPITAL AT COMPETITIVE RATES, OUR ABILITY TO
IMPLEMENT OUR FINANCIAL STRATEGY WILL BE ADVERSELY AFFECTED.

     We rely on access to both short-term money markets and longer-term capital
markets as a significant source of liquidity and for capital requirements not
satisfied by the cash flow from our operations. We believe that we will maintain
sufficient access to these financial markets based upon current credit ratings.
However, certain market disruptions or a downgrade of our credit rating may
increase our cost of borrowing or adversely affect our ability to access one or
more financial markets. Such disruptions could include:

     *    an economic downturn;

     *    capital market conditions generally;

     *    the bankruptcy of an unrelated energy company;

     *    market prices for electricity and gas;

     *    terrorist attacks or threatened attacks on our facilities or unrelated
          energy companies; or

     *    the overall health of the utility industry.

     Changes in economic conditions could result in higher interest rates, which
would increase our interest expense on our debt and reduce funds available to us
for our current plans. Additionally, an increase in our leverage could adversely
affect us by:

     *    increasing the cost of future debt financing;

     *    increasing our vulnerability to adverse economic and industry
          conditions;

     *    requiring us to dedicate a substantial portion of our cash flow from
          operations to payments on our debt, which would reduce funds available
          to us for operations, future business opportunities or other purposes;
          and

     *    placing us at a competitive disadvantage compared to our competitors
          that have less debt.

     See the preceding and following Risk Factors.

     ANY REDUCTION IN OUR CREDIT RATINGS COULD MATERIALLY AND ADVERSELY AFFECT
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     We cannot be sure that any of our current ratings will remain in effect for
any given period of time or that a rating will not be lowered or withdrawn
entirely by a rating agency if, in its judgment, circumstances in the future so
warrant. Any downgrade could increase our borrowing costs which would diminish
our financial results. We would likely be required to pay a higher interest rate
in future financings, and our potential pool of investors and funding sources
could decrease. A downgrade could require additional support from letters of
credit or cash collateral and otherwise have a material adverse effect on our
business, financial condition and results of operations. If our short-term
ratings were to be lowered, it could limit our access to the commercial paper
market. We note that the ratings from credit agencies are not recommendations to
buy, sell or hold our securities and that each rating should be evaluated
independently of any other rating. See the preceding two Risk Factors.

     THE USE OF DERIVATIVE CONTRACTS IN THE NORMAL COURSE OF OUR BUSINESS COULD
RESULT IN FINANCIAL LOSSES THAT NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.

     Our operations include managing market risks related to commodity prices,
changes in interest rates, and investments held by our pension and nuclear
decommissioning trust funds. We are exposed to the impact of market fluctuations
in the price and transportation costs of electricity, natural gas, coal, and

                                       2
<PAGE>
emissions allowances. We employ established procedures to manage risks
associated with these market fluctuations by utilizing various commodity
derivatives, including exchange-traded futures and options and over-the-counter
forwards, options, and swaps. As part of our overall risk management program, we
enter into derivative transactions 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 commodity.

     We are exposed to losses in the event of nonperformance or nonpayment by
counterparties. We use a risk management process to assess and monitor the
financial exposure of all counterparties. Despite the fact that the majority of
trading counterparties are rated as investment grade by the credit rating
agencies, there is still a possibility that one or more of these companies could
default, resulting in a material adverse impact on our earnings for a given
period.

     Changing interest rates will affect interest paid on variable-rate debt and
interest earned by our pension and nuclear decommissioning trust funds. Our
policy is to manage interest rates through the use of a combination of
fixed-rate and floating-rate debt. The pension and nuclear decommissioning funds
also have risks associated with changing market values of equity investments.
Pension and nuclear decommissioning costs are recovered in regulated electricity
prices.

     WE ARE SUBJECT TO COMPLEX GOVERNMENT REGULATION WHICH MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS AND OUR RESULTS OF OPERATIONS.

     We are, directly and through our subsidiaries, subject to governmental
regulation which may have a negative impact on our business and results of
operations. We are a "holding company" within the meaning of the Public Utility
Holding Company Act ("PUHCA"); however, we are exempt from the provisions of
PUHCA by virtue of our filing of an annual exemption statement with the
Securities and Exchange Commission ("SEC").

     APS, our wholly-owned electric utility is subject to comprehensive
regulation by several federal, state and local regulatory agencies, which
significantly influence its operating environment and may affect its ability to
recover costs from utility customers. APS is required to have numerous permits,
approvals and certificates from the agencies that regulate APS' business. We
believe the necessary permits, approvals and certificates have been obtained for
APS' existing operations; however, we are unable to predict the impact on our
operating results from the future regulatory activities of any of these
agencies. Changes in regulations or the imposition of additional regulations
could have an adverse impact on our results of operations.

     The Federal Energy Regulatory Commission ("FERC"), the Nuclear Regulatory
Commission ("NRC"), the Environmental Protection Agency ("EPA"), and the ACC
regulate many aspects of our utility operations, including siting and
construction of facilities, customer service and the rates that APS can charge
customers.

     We are unable to predict the impact on our business and operating results
from future regulatory activities of these federal, state and local agencies.
Changes in regulations or the imposition of additional regulations could have a
negative impact on our business and results of operations.

     DEREGULATION OR RESTRUCTURING OF THE ELECTRIC INDUSTRY MAY RESULT IN
INCREASED COMPETITION, WHICH COULD HAVE A SIGNIFICANT ADVERSE IMPACT ON OUR
BUSINESS AND OUR FINANCIAL RESULTS.

     Retail competition and the unbundling of regulated energy could have a
significant adverse financial impact on us due to an impairment of assets, a
loss of retail customers, lower profit margins or increased costs of capital. In
1999, the ACC approved rules that provide a framework for the introduction of

                                       3
<PAGE>
retail electric competition in Arizona. Under the rules, as modified by a 1999
settlement agreement among APS and various parties, APS was required to transfer
all of its competitive electric assets and services to an unaffiliated party or
parties or to a separate corporate affiliate or affiliates no later than
December 31, 2002. On September 10, 2002, the ACC unilaterally modified the 1999
settlement agreement and directed APS to cancel any plans to divest interests in
any of its generating assets. The ACC further established a requirement that APS
competitively procure, at a minimum, any power required for its retail customers
that APS cannot produce from its existing generating assets. The ACC ordered the
ACC staff and interested parties to develop a competitive procurement process by
March 1, 2003. These regulatory developments and legal challenges to the rules
have raised considerable uncertainty about the status and pace of retail
electric competition in Arizona. Although some very limited retail competition
existed in APS' service area in 1999 and 2000, there are currently no active
retail competitors offering unbundled energy or other utility services to APS'
customers. As a result, we cannot predict when, and the extent to which,
additional competitors will re-enter APS' service territory. These matters are
discussed in detail in the documents filed by us with the SEC.

     As a result of changes in federal law and regulatory policy, competition in
the wholesale electricity market has greatly increased due to a greater
participation by traditional electricity suppliers, non-utility generators,
independent power producers, and wholesale power marketers and brokers. This
increased competition could affect our load forecasts, plans for power supply
and wholesale energy sales and related revenues. As a result of the changing
regulatory environment and the relatively low barriers to entry, we expect
wholesale competition to increase. As competition continues to increase, our
financial position and results of operations could be adversely affected.

     THE UNCERTAIN OUTCOME REGARDING THE CREATION OF REGIONAL TRANSMISSION
ORGANIZATIONS, OR RTOS, MAY MATERIALLY IMPACT OUR OPERATIONS, CASH FLOWS OR
FINANCIAL POSITION.

     In a December 1999 order, the FERC set minimum characteristics and
functions that must be met by utilities that participate in RTOs. The
characteristics for an acceptable RTO include independence from market
participants, operational control over a region large enough to support
efficient and nondiscriminatory markets, and exclusive authority to maintain
short-term reliability. On October 16, 2001, APS and other owners of electric
transmission lines in the Southwest filed with the FERC a request for a
declaratory order confirming that their proposal to form WestConnect RTO, LLC
would satisfy the FERC's requirements for the formation of an RTO. On October
10, 2002, the FERC issued an order finding that the WestConnect proposal, if
modified to address specified issues, could meet the FERC's RTO requirements and
provide the basic framework for a standard market design for the Southwest . In
its order, the FERC also stated that its approval of various WestConnect
provisions addressed in the order would not be overturned or affected by the
final rule the FERC intends to ultimately adopt in response to its July 31, 2002
Notice of Proposed Rulemaking regarding a standard market design for the
electric utility industry. FERC did not address all of the proposed WestConnect
provisions in its order and some could still be affected by a final rule in the
pending rulemaking proceeding. We cannot currently predict what, if any, impact
there may be to the WestConnect proposal or to us if the FERC adopts the
proposed rule. On November 12, 2002, APS and other owners filed a request for
rehearing and clarification on portions of the October 10 order.

     WE ARE SUBJECT TO NUMEROUS ENVIRONMENTAL LAWS AND REGULATIONS WHICH MAY
INCREASE OUR COST OF OPERATIONS, IMPACT OUR BUSINESS PLANS, OR EXPOSE US TO
ENVIRONMENTAL LIABILITIES.

     We are subject to numerous environmental regulations affecting many aspects
of our present and future operations, including air emissions, water quality,
wastewater discharges, solid waste, and hazardous waste. These laws and
regulations can result in increased capital, operating, and other costs,
particularly with regard to enforcement efforts focused on power plant emissions
obligations. These laws and regulations generally require us to obtain and
comply with a wide variety of environmental licenses, permits, inspections and
other approvals. Both public officials and private individuals may seek to
enforce applicable environmental laws and regulations. We cannot predict the
outcome (financial or operational) of any related litigation that may arise.

                                       4
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     In addition, we may be a responsible party for environmental clean up at
sites identified by a regulatory body. We cannot predict with certainty the
amount and timing of all future expenditures related to environmental matters
because of the difficulty of estimating clean-up costs. There is also
uncertainty in quantifying liabilities under environmental laws that impose
joint and several liability on all potentially responsible parties.

     We cannot be sure that existing environmental regulations will not be
revised or that new regulations seeking to protect the environment will not be
adopted or become applicable to us. Revised or additional regulations that
result in increased compliance costs or additional operating restrictions,
particularly if those costs are not fully recoverable from APS' customers, could
have a material adverse effect on our results of operations.

     RECENT EVENTS IN THE ENERGY MARKETS THAT ARE BEYOND OUR CONTROL MAY HAVE
NEGATIVE IMPACTS ON OUR BUSINESS.

     As a result of the energy crisis in California during the summer of 2001,
the recent volatility of natural gas prices in North America, the filing of
bankruptcy by the Enron Corporation, and investigations by governmental
authorities into energy trading activities, companies generally in the regulated
and unregulated utility businesses have been under an increased amount of public
and regulatory scrutiny. The capital markets and ratings agencies also have
increased their level of scrutiny. We believe that we are complying with all
applicable laws, but it is difficult or impossible to predict or control what
effect these or related issues may have on our business or our access to the
capital markets.

     OUR RESULTS OF OPERATIONS CAN BE ADVERSELY AFFECTED BY MILDER WEATHER.

     Weather conditions directly influence the demand for electricity and affect
the price of energy commodities. Electric power demand is generally a seasonal
business. In Arizona, demand for power peaks during the hot summer months, with
market prices also peaking at that time. As a result, our overall operating
results fluctuate substantially on a seasonal basis. In addition, we have
historically sold less power, and consequently earned less income, when weather
conditions are milder. As a result, unusually mild weather could diminish our
results of operations and harm our financial condition.

     THERE ARE INHERENT RISKS IN THE OPERATION OF NUCLEAR FACILITIES, SUCH AS
ENVIRONMENTAL, HEALTH AND FINANCIAL RISKS AND THE RISK OF TERRORIST ATTACK.

     Through APS, we have an ownership interest in and operate the Palo Verde
Nuclear Generating Station ("Palo Verde"). Palo Verde is subject to
environmental, health and financial risks such as the ability to dispose of
spent nuclear fuel, the ability to maintain adequate reserves for
decommissioning, potential liabilities arising out of the operation of these
facilities, and the costs of securing the facilities against possible terrorist
attacks. We maintain decommissioning trusts and external insurance coverage to
minimize our financial exposure to these risks; however, it is possible that
damages could exceed the amount of insurance coverage.

     The NRC has broad authority under federal law to impose licensing and
safety-related requirements for the operation of nuclear generation facilities.
In the event of noncompliance, the NRC has the authority to impose fines or shut
down a unit, or both, depending upon its assessment of the severity of the
situation, until compliance is achieved. In addition, although we have no reason
to anticipate a serious nuclear incident at Palo Verde, if an incident did
occur, it could materially and adversely affect our results of operations or
financial condition. A major incident at a nuclear facility anywhere in the
world could cause the NRC to limit or prohibit the operation or licensing of any
domestic nuclear unit.

     The operation of Palo Verde requires licenses that need to be periodically
renewed and/or extended. We do not anticipate any problems renewing these
licenses. However, as a result of potential terrorist threats and increased
public scrutiny of utilities, the licensing process could result in increased
licensing or compliance costs that are difficult or impossible to predict.

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