DEFERRED COMPENSATION PLAN OF 2005 FOR EMPLOYEES OF PINNACLE WEST CAPITAL CORPORATION AND AFFILIATES

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ARTICLE 1 Definitions

1

ARTICLE 2 Selection, Enrollment, Eligibility

4

2.1

Eligibility

4

2.2

Enrollment Requirements

4

2.3

Eligibility; Commencement of Participation

4

2.4

Loss of Eligibility to Participate

5

ARTICLE 3 Deferral Commitments/Interest Crediting

5

3.1

Deferral

5

3.2

Maximum Deferral

5

3.3

Election to Defer; Effect of Election Form

5

3.4

Withholding of Deferral Amounts

6

3.5

Interest Crediting Prior to Distribution

6

3.6

Change in Time and Form of Payment

6

3.7

Installment Distribution

6

3.8

FICA Taxes

7

ARTICLE 4 Short-Term Payout and Unforeseeable Financial Emergencies

8

4.1

Short-Term Payout

8

4.2

Withdrawal Payout; Suspensions for Unforeseeable Financial Emergencies

8

ARTICLE 5 Payment of Benefits

8

5.1

Payment of Termination Benefit

8

5.2

Death Prior to Pay Out

9

ARTICLE 6 Disability Credit

9

6.1

Disability Credit

9

ARTICLE 7 Beneficiary Designation

9

7.1

Beneficiary

10

7.2

Beneficiary Designation and Change; Spousal Consent

10

7.3

Acknowledgment

10

7.4

No Beneficiary Designation

10

7.5

Doubt as to Beneficiary

10

7.6

Discharge of Obligations

10

ARTICLE 8 Leave of Absence

10

8.1

Paid Leave of Absence

10

8.2

Unpaid Leave of Absence

10

8.3

Definition of Leave of Absence

11

ARTICLE 9 Termination, Amendment or Modification

11

9.1

Termination

11

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9.2

Amendment

11

ARTICLE 10 Administration

11

10.1

Committee Duties

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10.2

Agents

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10.3

Binding Effect of Decisions

11

10.4

Indemnity of Committee

11

10.5

Employer Information

11

ARTICLE 11 Other Benefits and Agreements

12

11.1

Coordination with Other Benefits

12

ARTICLE 12 Claims Procedures

12

12.1

Claims

12

ARTICLE 13 Miscellaneous

12

13.1

Unsecured General Creditor

12

13.2

Employer’s Liability

12

13.3

Nonassignability

12

13.4

Not a Contract of Employment

12

13.5

Furnishing Information

13

13.6

Terms

13

13.7

Captions

13

13.8

Governing Law

13

13.9

Validity

13

13.10

Notice

13

13.11

Successors

13

13.12

Spouse’s Interest

13

13.13

Incompetent

13

13.14

Commencement of Payments

14

13.15

Interpretation of Plan Provisions

14

1.1

“Account Balance” shall mean the sum of (i) the Deferral Amount, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of the Plan, reduced by all Short-Term Payouts, if made. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan.

1.2

“Annual Deferral” shall mean that portion of a Participant’s Base Annual Salary, Restricted Stock Units (but only if deferral of Restricted Stock Units is permitted by the Company), Year-End Bonus and/or Directors Fees that a Participant elects to have and is deferred, in accordance with Article 3, for any one Plan Year. In the event of Disability, death or a Separation from Service prior to the end of a Plan Year and prior to 2008, such year’s Annual Deferral shall be the actual amount withheld prior to such event.

1.3

“Base Annual Salary” shall mean the annual compensation, excluding bonuses, commissions, overtime, incentive payments, non-monetary awards, Directors Fees and other fees paid to a Participant for employment services rendered to any Employer, before reduction for compensation deferred pursuant to all qualified, non-qualified and Code Section 125 compensation plans of any Employer.

1.4

“Beneficiary” shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 7, that are entitled to receive benefits under this Plan upon the death of a Participant.

1.5

“Beneficiary Designation Form’’ shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Company to designate one or more Beneficiaries.

1.6

“Board” shall mean the Board of Directors of the Company.

1.7

“Bonus Rate” for a Plan Year shall mean an interest rate determined for each Plan Year by the Committee, in its sole discretion, which rate shall be determined on or before the first business day of the month that precedes the beginning of the Plan Year for which the rate applies.

1.8

“Change of Control” shall have the meaning set forth in the Key Executive Employment and Severance Agreement issued to certain employees of the Company.

1.9

“Claimant” shall have the meaning set forth in Section 12.1.

1.10

“Code” shall mean the Internal Revenue Code of 1986, as amended.

1.11

“Committee” shall mean the administrative committee appointed to manage and administer the Plan in accordance with its provisions pursuant to Article 10.

1.12

“Company” shall mean Pinnacle West Capital Corporation, an Arizona corporation.

1.13

“Crediting Rate” for a Plan Year shall mean a rate of interest equal to the ten-year U.S. Treasury Note rate as published on the last business day of the first week of October preceding a Plan Year.

1.14

“Deferral” shall mean the sum of all of a Participant’s Annual Deferrals.

1.15

“Director” shall mean any member of the board of directors of an Employer.

1.16

“Directors Fees” shall mean the annual fees paid by an Employer, including retainer fees and meetings fees, as compensation for serving on a board of directors of an Employer.

1.17

“Disability” shall mean (i) in the case of a Participant who is an employee of an Employer, a period of disability during which a Participant qualifies for benefits under the Participant’s Employer’s long-term disability plan, or (ii) in the case of a Participant who is a Director, a period of disability during which the Participant would have qualified for benefits under such a plan, as determined in the sole discretion of the Committee, had the Participant been an employee of an Employer.

1.18

“Disability Benefit” shall mean the benefit set forth in Article 6.

1.19

“Effective Date” shall mean January 1, 2005.

1.20

“Election Form” shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Company to make an election under the Plan.

1.21

“Employer” shall mean the Company, Arizona Public Service Company, an Arizona corporation, SunCor Development Company, an Arizona corporation, El Dorado Investment Company, an Arizona corporation, and/or any subsidiaries of such corporations that have been selected by the Board to participate in the Plan.

1.22

“Participant” shall mean any employee or Director of an Employer (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, and (iii) who signs an Election Form and a Beneficiary Designation Form.

1.23

“Plan” shall mean the Deferred Compensation Plan of 2005 for Employees of Pinnacle West Capital Corporation and Affiliates, which shall be evidenced by this instrument, as amended from time to time.

1.24

“Plan Year” shall begin on January 1 of each year and continue through December 31.

1.25

“Preferred Rate” for a Plan Year shall mean the Crediting Rate plus the Bonus Rate for such Plan Year.

1.26

“Restricted Stock Units” shall have the meaning assigned to that term under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan.

1.27

“Retirement” and “Retires” shall mean, with respect to an employee, Separation from Service for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five (65) with five (5) Years of Service or (b) age fifty-five (55) with ten (10) Years of Service; and shall mean, with respect to a Director who is not an employee, Separation from Service with all Employers on or after the earlier of the attainment of (x) age sixty-five (65) with five (5) Years of Service as a Director or (y) age fifty-five (55) with ten (10) Years of Service as a Director. If a Participant is both an employee and a Director, Retirement shall occur when he or she Retires as an employee.

1.28

“Separation from Service” or “Separates from Service” shall mean the ceasing of employment by an employee with all Employers or ceasing service as a Director of all Employers, voluntarily or involuntarily for any reason other than death. If a Participant is both an employee and a Director, a Separation from Service shall occur when he or she terminates employment as an employee, and the Participant shall become an inactive Participant (as defined in the last sentence of Section 2.4) at such point in time. Except as provided in the preceding sentence and the resolution of the Board defining such term, “Separation from Service” and “Separates from Service” shall be determined in accordance with the default rules set forth in the regulations issued under Code Section 409A.

1.29

“Short-Term Payout” shall mean the payout set forth in Section 4.1.

1.30

“Specified Employee” shall have the meaning set forth in Section 409A of the Code, the regulations issued thereunder, and the resolution issued by the Board defining such term.

1.31

“Termination Benefit” shall mean the benefit set forth in Article 5.

1.32

“Unforeseeable Financial Emergency” shall mean a severe financial hardship to the Participant resulting from (i) an illness or accident of the Participant, the Participant’s Beneficiary, or the Participant’s spouse or dependent (as defined in Code Section 152(a)), (ii) loss of the Participant’s property due to casualty or (iii) other similar extraordinary and unforeseeable

circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee.

1.33

“Year-End Bonus” shall mean compensation paid to a Participant who is an employee as an annual bonus under any Employer’s regular annual bonus and incentive plans. Special bonuses, nuclear-specific bonuses, estimated bonuses paid by SunCor Development Company, large asset bonus plan payments, and incentive payments made to a Participant shall not constitute “Year-End Bonuses.”

1.34

“Years of Plan Participation” shall mean the total number of full Plan Years a Participant has been a Participant in the Plan and has either (i) made deferral elections or (ii) had an Account Balance. For purposes of a Participant’s first Plan Year of participation only, any partial Plan Year of participation shall be treated as a full Plan Year. For purposes of a Participant’s final Plan Year of participation only, a Participant shall be awarded a Year of Plan Participation if, and only if, he or she has been credited with 1,000 hours of service in such Plan Year. A single Plan Year of Plan participation described above shall be referred to as a “Year of Plan Participation.”

1.35

“Years of Service” shall mean the total number of years of employment during which a Participant has been credited with at least 1,000 hours of service in each of those years. For purposes of this definition only, (i) Participants who are employees shall be credited with ten (10) hours of service for each working day during which they are employed by the Employer and Participants who are Directors shall be credited with ten (10) hours of service for each day (other than weekend days) during which they serve as a Director, provided that no Participant shall be credited with more than 1,000 hours of service in any one year of employment, and (ii) a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the employee’s date of hiring or the date the Director begins his or her service as a Director and that, for any subsequent year, commences on an anniversary of that date.

2.1

Eligibility . Participation in the Plan shall be limited to a select group of management, highly compensated employees and Directors of the Employers. All officers and members of the Senior Management Group may participate in the Plan, excluding presidents of subsidiaries of SunCor Development Company.

2.2

Enrollment Requirements . As a condition to participation, each selected employee or Director shall complete, execute and return to the Company an Election Form and a Beneficiary Designation Form. To the extent permitted by the Committee, a selected employee or Director may enroll in the Plan and make elections by electronic means. In addition, the Committee, in its sole discretion, may establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary.

2.3

Eligibility; Commencement of Participation . When an employee or Director first becomes eligible to participate in the Plan, that employee or Director may commence participation in the Plan at any time within 30 days after his or her initial qualification for eligibility. When a Participant has ceased being eligible to participate in the Plan (other than by the accrual of earnings), and subsequently becomes eligible to participate in the Plan again more than 24 months after first not being eligible to participate in the Plan, the Participant will be treated as a new Participant and will be allowed to recommence participation in the Plan at any time within

30 days after his or her requalification for eligibility. If an employee or Director fails to submit an Election Form to the Company within 30 days after his or her initial qualification or requalification for eligibility, that employee or Director shall not be eligible to submit an Election Form until the election period effective the following January 1.

2.4

Loss of Eligibility to Participate . If the status of a Participant changes, without a Separation from Service, so that he or she is no longer an employee eligible to participate pursuant to Section 2.1, he or she shall become an inactive Participant as of the last day of the Plan Year in which such change of status occurred. Inactive Participants shall continue to participate in the Plan for all purposes other than for purposes of making deferrals under Section 3.1 and 3.2.

3.1

Deferral . Subject to Section 3.2 below, a Participant may defer eligible compensation for each Plan Year starting with his or her commencement of participation in the Plan and ending immediately prior to his or her death or Separation from Service.

3.2

Maximum Deferral . Subject to Section 3.3, for each Plan Year, a Participant may defer up to fifty percent (50%) of his or her Base Annual Salary, up to one hundred percent (100%) of his or her Year-End Bonus, up to 100% of his or her Restricted Stock Units (if the Company allows deferrals of Restricted Stock Units), and/or up to one hundred percent (100%) of his or her Directors Fees.

3.3

Election to Defer; Effect of Election Form . In connection with a Participant’s initial commencement (or in certain cases described in Section 2.3, recommencement) of participation in the Plan, the Participant may file an Election Form within 30 days after becoming eligible to participate. If this initial Election Form is filed after the beginning of the calendar year to which the Election Form relates, the Participant may elect only to defer his or her Base Annual Salary for pay periods commencing after the filing of his or her Election Form. For each succeeding Plan Year, a Participant may elect to defer from his or her Base Annual Salary, Year-End Bonus and/or Directors Fees (and Restricted Stock Units to the extent permitted by the Company) an Annual Deferral by delivering to the Company a completed Election Form before the January 1 of the calendar year in which the Participant earns the compensation he or she is deferring, which election and