To: Editors, News Directors

Date: March 28, 2003

For: Immediate Release

Regulators Approve Financing for APS and Parent, Pinnacle West

PHOENIX - The Arizona Corporation Commission today authorized Arizona Public Service (APS) to obtain up to $500 million in financing - through either a loan or a guarantee - and loan the money to Pinnacle West Energy Corporation to finance its newest power generating stations.

The new generating units include West Phoenix Units 4 and 5, Saguaro Unit 3 and Redhawk Units 1 and 2. Together, these units represent more than 1,850 megawatts of new, state-of-the-art generation capacity.

The structure of the financing will essentially make APS, the regulated utility, a lien holder on the generating assets currently owned by a sister company, Pinnacle West Energy Corporation. In return, APS will receive up to $23 million in interest payments from Pinnacle West over the four year life of the loan. That interest will be used to offset the rates of APS customers.

Commission Chairman Marc Spitzer characterized the Commission's decision as putting an end to the meltdown of the financial markets that made it nearly impossible for energy firms to obtain financing at reasonable rates.

"Arizona's two biggest utilities are through the crisis in terms of the legal, regulatory and now financial reconstruction following the California energy crisis," Chairman Spitzer said. "That crisis created a meltdown in investor confidence and the financial community's interest in energy stocks."

"Following the California energy crisis, the Commission began an exhaustive review of the electric competition rules and the state's path toward a more competitive market," Commissioner Jim Irvin explained. "An unprecedented economic downturn in the energy markets mandated that this Commission act quickly and decisively to preserve the financial integrity of APS and protect our state's ratepayers."

"Our prior orders and today's decision creates a framework that will support strong, financially viable utilities in Arizona while at the same time protecting ratepayers," Commissioner Bill Mundell said.

The Commission's Track A decision from September 2002 eliminated the requirement that APS and Tucson Electric Power sell off their generating assets or place them in a separate subsidiary. As a result, Pinnacle West's newest units - the plants that were built with investor money - were structurally separated from the older power plants built with ratepayer dollars.

Interim financing that parent company Pinnacle West Capital Corporation originally secured to build the plants was coming due. Pinnacle West had obtained interim financing with the expectation that all generating assets would one day be unified under the same corporate entity. Once all the assets were under the same holding company, Pinnacle West expected that it could refinance its loans at more favorable terms.

That was before the power crisis in California and the ripple effect of the Enron debacle.

"By approving the financing, the Commission sustains the financial strength of APS and its family of companies, assures investor certainty and protects APS' ratepayers," Commissioner Jeff Hatch-Miller said. "This decision maintains Commission oversight so that APS' ratepayers are shielded from potential financial harm."

An amendment sponsored by Commissioner Mundell adds additional protections for ratepayers. With the amendment, the Commission retains its right to review any sales, restructurings or reorganizations of Pinnacle West corporate holdings in excess of $100 million - regardless of whether the affiliate is a regulated entity.

"I wanted to be certain that the company could not, through this financing, create a liability for ratepayers," Mundell explained. "The Commission has a responsibility to protect ratepayers, which we did by maintaining jurisdiction over APS' security interests in the generating assets."

Commissioner Mike Gleason voted against the final order. He had sought his fellow Commissioners' approval to eliminate the loan option but approve a guarantee.

"A loan in unacceptable. While I believe that Pinnacle West Energy Corporation does need APS' credit support, a guarantee is the only type of refinancing that is in the public interest," Gleason believes.

"A guarantee, unlike a loan, would not require APS to make loan payments in the event of a default. APS' cash would remain available to fund needed utility operations. Although the record did not show evidence that Pinnacle West Energy would miss payments or default, the reality of a volatile wholesale market requires the Commission to consider this unlikely result," the Gleason amendment stated.

The other commissioners voted against the Gleason amendment because they did not want to limit the company's ability to obtain favorable financing in the form of a loan, a guarantee or a combination of both.

The Administrative Law Judge's recommendation to the Commissioners contained a number of important conditions designed to protect ratepayers from any risks associated with the financing. Those conditions include:

1. APS should be authorized to issue and sell no more than $500,000,000 of debt in addition to its current authorizations;

2. The debt to be lent to Pinnacle West Energy Corporation (PWEC) should be no more than $500,000,000 of secured callable notes from PWEC. The security interest shall be on the same terms as the security interest APS already has pursuant to the $125,000,000 loan authorization from Decision No. 65434;

3. The PWEC secured note coupon shall be 264 basis points above the coupon on APS debt issued and sold on equivalent terms (including but not limited to maturity and security);

4. The difference in interest income and interest expense should be capitalized as a deferred credit and used to offset rates in the future. The deferred credit balance shall bear an interest rate of six percent;

5. The PWEC debt maturity shall not exceed four years, unless otherwise ordered by the Commission;

6. Any demonstrable increase in APS' cost of capital as a result of the transaction, such as from a decline in bond rating, will be extracted from future rate cases;

7. APS shall maintain a minimum common equity of 40 percent and shall not be allowed to pay dividends if such payment would reduce its common equity ratio below this threshold, unless otherwise waived by the Commission. This condition shall remain in effect indefinitely, and APS shall file with the Commission a calculation of capital structure within one week of filing a 10-Q or 10-K;

8. The debt authorized herein will be included in the capital structure calculation to determine whether APS can issue dividends;
   Any guarantee shall meet the same concerns identified in Staff's seven conditions (1 through 7 above);

9. APS shall immediately notify the Commission within five business days in the event of a default on the loan, so that the Commission can take appropriate action;

10. APS' debt issuance be for unsecured debt only;

11. Neither PWCC nor PWEC shall reorganize or restructure, acquire or divest assets or form, buy or sell affiliates, or pledge or otherwise encumber the PWEC generation assets during the duration of the loan/guarantee without prior Commission approval. This requirement will apply to reorganizations and restructurings, including the formation, buying or selling of affiliates, acquisitions or divestitures of assets in the amount of $100 million or greater, measured on a cumulative basis over the calendar year in which the transactions will be made. Further, those transactions identified in the Company's "recovery plan", including the accelerated sale of SunCor assets in the amount of $80 - 100 million per year for 3 years; the sale of 25 percent of the Silverhawk generation project to the Southern Nevada Water Authority; and the payment of ongoing construction costs for the West Phoenix CC #5 and the Silverhawk generation plant in Nevada would not need prior Commission approval.

12. During the term of the loan or guarantee, APS and its affiliates must comply with all the Affiliated Interest Rules.

The final Commission order will be posted on the Commission website under the following link: www.cc.state.az.us/utility/electric/APS-index.htm. Before the order can be posted, the amendments must be integrated, the Commissioners have to sign the official order and it must be docketed. This may take a week or more as there were detailed written and verbal amendments.