Fitch Comments on PNW Subsidiary APS's Emergency PSA Rate Order.

NEW YORK -- The ratings of Pinnacle West Capital Corporation (PNW) and its primary operating utility subsidiary, Arizona Public Service Company (APS), are unchanged by the Arizona Corporation Commission's (ACC) recent bench order in APS's emergency Power Supply Adjustor (PSA) rate increase request. The order, which was issued by the ACC on May 2, 2006, approved approximately a $140 million interim rate increase to recover deferred fuel costs pending final review in the utility's general rate case. PNW and APS's credit ratings are as follows:

PNW

--Issuer Default Rating (IDR) 'BBB-';

--Senior unsecured 'BBB-';

--Short term 'F3'.

APS:

--IDR BBB-;

--Senior unsecured BBB;

--Short term F-2.

The Outlook on all Ratings is Stable.

PNW and APS's ratings and Outlook consider the utility's rapidly growing electric service territory and solid credit metrics. While PNW and APS's credit metrics are consistent with slightly higher rated peers, the ratings also reflect the potential negative financial impact and liquidity challenges resulting from high and volatile variable costs due to the utility's growing reliance on natural gas and purchased power, and provisions that limit recovery of power supply costs under APS's commission-approved Power Supply Adjustor (PSA). The ACC's supportive response to the company's request for emergency rate relief authorizes a $140 million interim rate increase to recover deferred power supply costs, subject to a final ruling in APS's general rate case.

Prior rate decisions have been less constructive to the credit profile of APS. The January 2006 downgrade of APS by Fitch Ratings was triggered by rejection of the company's surcharge request for recovery of deferred power supply costs, and adoption of PSA provisions by the commission that are less favorable than had been anticipated by Fitch in its previous ratings (See the Fitch press release dated Jan. 30, 2006 for further information). As a result of ACC's January 2006 PSA surcharge ruling, power supply costs are reviewed just once a year, with recovery beyond a predetermined bandwidth subject to a separate surcharge proceeding.

In addition, the ACC emergency PSA rate order continues the waiver of the $776 million annual rate cap initially granted in the January 2006 PSA order until it can be addressed in APS's general rate case. Importantly, the bench order calls on the parties to the rate case to propose modifications to the PSA to address power supply cost recovery and timing issues on permanent basis. A final order in the general rate case is expected in the first quarter of 2007.

The ratings and Outlook also assume that the Palo Verde Nuclear Generating Station (PVNGS) Unit 1 will return to service by the end of June 2006 and that the performance of the three unit PVNGS will improve in the second half of 2006 and beyond. However, failure to resolve operating problems at PVNGS unit 1 and return it to the grid by the end of June 2006 could result in negative rating actions in the near-term. Conversely, a reasonable outcome in APS's pending general rate case, including modifications to the PSA that result in greater confidence that prudently incurred power supply costs will be recovered, in full, on a timely basis, along with better nuclear plant performance, could lead to favorable rating actions, in Fitch's view, in the intermediate to longer term.

For further information see Fitch's Update Report and Credit Analysis regarding PNW and APS dated July 29, 2005 and May 4, 2005, respectively, available on the Fitch Ratings web site www.fitchratings.com.

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