Fitch Affirms PNW & APS' Unsecured Ratings at 'BBB' & 'BBB+'; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed the senior unsecured debt ratings of Pinnacle West Capital Corporation (PNW) at 'BBB' and the senior unsecured ratings of its wholly owned electric utility subsidiary, Arizona Public Service Company (APS), at 'BBB+'. Fitch has also affirmed APS' 'BBB' secured lease obligation bond ratings and both PNW and APS' 'F2' commercial paper ratings. The Rating Outlook for all PNW and APS securities is Stable. The affirmation of the PNW and APS ratings by Fitch resolves the Negative Rating Outlook, which was initially adopted in May 2003 to reflect the possibility that the Arizona Corporation Commission (ACC) would not allow unregulated generation built by PNW to meet APS load growth to be transferred and included in the utility's rate base.

The rating affirmation and Stable Outlook for PNW and APS reflects the constructive final outcome in the utility's general rate case (GRC) that, in Fitch's view, will result in a meaningfully improved risk profile at APS and its direct parent, PNW. The ratings and Stable Outlook also consider PNW and APS' solid interest coverage ratios, moderately high debt leverage ratios relative to the current rating category, and the utility's attractive service territory characteristics.

On Monday, March 28, 2005, the Arizona Corporation Commission (ACC) issued a final order in APS' GRC adopting, with relatively minor modifications, the utility's proposed settlement agreement with virtually all relevant intervenor groups. The ACC order approves the transfer of 1,800 megawatts of non-utility generating capacity built by PNW's unregulated subsidiary, Pinnacle West Energy Corp. (PWEC), to APS and inclusion in the utility's rate base. The ACC order also approved the settlement's moratorium on APS' ability to self-build for nearly 10 years, implying greater reliance on wholesale generators to meet its rapid native load growth. However, the company retains the self-build option if wholesale power markets are unable to effectively meet the company's supply requirements and can, in any event, purchase unregulated generating capacity with commission approval.

In addition, the ACC order adopts a power supply adjuster (PSA), which is expected to significantly reduce APS commodity risk. The PSA allows 90% of net costs or benefits resulting from deviations in fuel and purchase power costs from amounts included in the rate base to be passed through to customers. The automatic pass-through feature is subject to approximately a $100 million cumulative cap on cost overruns, at which point ACC approval would be required to recover additional fuel and purchase power costs. The ACC order also authorizes a $75 million rate increase based on a 10.25% authorized return on equity. The rate increase marks the conclusion of the utility's first general rate case in 14 years, during which time customer rates were lowered 16%.

The revenue increase at PNW's utility operation is expected to enhance APS' relative contribution to consolidated PNW results, as SunCor (PNW's real estate development business) approaches the end of its 2003-2005 accelerated sales program. As a result, Fitch expects the mix of PNW's operating income and cash flow to improve significantly. The primary credit concern is the possibility that APS' significant capital spending requirements over 2005-2006 to meet rapid Arizona native load growth will result in a meaningful increase in debt leverage and/or regulatory disallowances.

Under the terms of the ACC-approved settlement agreement, APS is expected to acquire the 1,800 megawatts of PWEC generating capacity at a price of $700 million. The purchase price compares to a carrying value of approximately $850 million and is estimated by Fitch to result in a $148 million pretax charge to earnings in 2005. APS' $500 million intercompany loan is expected to be used by the utility to fund the acquisition of the PWEC assets, which is expected to close later this year. FERC approval is needed for the PWEC assets to be included in rates.

PNW and APS' ratings by Fitch are as follows:

Pinnacle West Capital:

-- Senior unsecured debt 'BBB';

-- Commercial paper 'F2'.

Arizona Public Service Co.:

-- Senior unsecured debt 'BBB+';

-- Secured lease obligation bonds 'BBB';

-- Commercial Paper 'F2'.