Arizona. These economic conditions are reflected in the recent volatility and disruption in credit markets (see Note 4). As discussed in detail under "Pinnacle West Consolidated - Liquidity and Capital Resources" below, Pinnacle West and APS have ample borrowing capacity under their respective credit facilities and have been able to access these facilities, ensuring adequate liquidity for each company.
Our cash flows and profitability are affected by the rates APS may charge and the timely recovery of costs through those rates. APS' retail rates are regulated by the ACC and its wholesale electric rates (primarily for transmission) are regulated by the FERC. APS' capital expenditure requirements, which are discussed below under "Liquidity and Capital Resources," are substantial because of customer growth in APS' service territory, inflationary impacts on the capital budget and increased generation, environmental and reliability costs, highlighting APS' need for the timely recovery through rates of these and other expenditures. See "Pinnacle West Consolidated - Factors Affecting Our Financial Outlook" below. On March 24, 2008, APS filed a rate case with the ACC, which it updated on June 2, 2008, requesting, among other things, an increase in rates to help defray rising infrastructure costs, approval of an impact fee and approval of new conservation rates. Details of the current ACC rate case, a request for an interim increase related to this rate case, and other retail and wholesale rate matters are discussed in Note 5.
SunCor, our real estate development subsidiary, has been an important source of earnings in recent years, although SunCor's earnings in 2007 and expected earnings in 2008 reflect the weak real estate market and current economic conditions. See discussion below in "Pinnacle West Consolidated - Factors Affecting our Financial Outlook - Subsidiaries." Our subsidiary, APSES, provides energy-related products and services to commercial and industrial retail customers in the western United States. El Dorado, our investment subsidiary, owns minority interests in several energy-related investments and Arizona community-based ventures.
We continue to focus on solid operational performance in our electricity generation and delivery activities. In the delivery area, we focus on superior reliability and customer satisfaction. We plan to expand long-term energy resources and our transmission and distribution systems to meet the electricity needs of our growing retail customers and sustain reliability.
See "Pinnacle West Consolidated - Factors Affecting Our Financial Outlook" below for a discussion of several factors that could affect our future financial results.
EARNINGS CONTRIBUTION BY BUSINESS SEGMENT Pinnacle West's two reportable business segments are:
• our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities and includes electricity generation, transmission and distribution; and

• our real estate segment, which consists of SunCor's real estate development and investment activities.

The following table presents income from continuing operations for our regulated electricity and real estate segments and reconciles those amounts to net income in total for the three months and nine months ended September 30, 2008 and 2007 (dollars in millions):

                                                  Three Months Ended                 Nine Months Ended
                                                     September 30,                     September 30,
                                                2008              2007             2008             2007
Regulated electricity segment                 $     158         $     205        $     273         $   278
Real estate segment                                  (7 )              (1 )            (13 )             9
All other (a)                                         -                (2 )              -              10

Income from continuing operations                   151               202              260             297
Income from discontinued operations,
real estate segment - net of tax (b)                  1                 7               21               7

Net income                                    $     152         $     209        $     281         $   304

(a) Includes activities related to marketing and trading, APSES and El Dorado. None of these segments is a reportable segment.

(b) Primarily relates to commercial property sales.

PINNACLE WEST CONSOLIDATED - RESULTS OF OPERATIONS Operating Results - Three-month period ended September 30, 2008 compared with three-month period ended September 30, 2007 Our consolidated net income decreased approximately $57 million, from $209 million for the three months ended September 30, 2007 to $152 million for the comparable current-year period. Various factors contributed to this decrease, including lower mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, higher operations and maintenance expenses, the effects of more average temperatures on retail sales, and lower sales by our real estate subsidiary resulting from the weak real estate market.
Additional details of these and other factors that increased (decreased) net income for the three-month period ended September 30, 2008 compared with the prior-year period are contained in the following table (dollars in millions):

                                                                      Increase (Decrease)
                                                                   Pretax           After Tax
Regulated electricity segment:
Lower mark-to-market valuations of fuel and purchased power
contracts related to changes in market prices, net of
related PSA deferrals                                             $     (28 )       $      (17 )
Effects of more normal weather on retail sales                          (23 )              (14 )
Transmission rate increases (including related retail rates)             12                  7
Higher retail sales primarily due to customer growth,
excluding weather effects                                                10                  6
Operations and maintenance expense increases primarily due
to:
Increased customer service and other costs, including
distribution system reliability                                         (21 )              (13 )
Increased generation costs, including more planned
maintenance                                                             (12 )               (7 )
Income tax benefits related to prior years resolved in 2007               -                (10 )
Miscellaneous items, net                                                  2                  1

Decrease in regulated electricity segment net income                    (60 )              (47 )
Lower real estate segment income from continuing operations
primarily due to lower land parcel and home sales resulting
from the weak real estate market                                        (10 )               (6 )
Other miscellaneous items, net                                            3                  2

Decrease in income from continuing operations                     $     (67 )              (51 )

Decrease in real estate segment income from discontinued
operations primarily due to decreased commercial property
sales                                                                                       (6 )

Decrease in net income                                                              $      (57 )

Regulated Electricity Segment Revenues
Regulated electricity segment revenues were $3 million lower for the three months ended September 30, 2008 compared with the prior-year period primarily because of:
• a $36 million decrease in retail revenue due to the effects of more normal weather;

• a $14 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because of lower amortization of the same amount recorded as fuel and purchased power expense;

• a $16 million increase in retail revenues primarily related to customer growth, excluding weather effects;

• a $12 million increase due to transmission rate increases (including related retail rates);

• a $7 million increase in revenues related to long-term traditional wholesale contracts;

• a $5 million increase in renewable energy surcharges offset in operations and maintenance expense; and

• a $7 million net increase due to miscellaneous factors.

Real Estate Segment Revenues
Real estate segment revenues were $28 million lower for the three months ended September 30, 2008 compared with the prior-year period primarily due to lower land parcel and home sales as a result of the weak real estate market. All Other Revenues
All other revenues were $94 million lower for the three months ended September 30, 2008 compared with the prior-year period primarily due to planned reductions of APSES' retail commodity-related energy services and other marketing and trading activities.
Operating Results - Nine-month period ended September 30, 2008 compared with nine-month period ended September 30, 2007 Our consolidated net income decreased approximately $23 million, from $304 million for the nine months ended September 30, 2007 to $281 million for the comparable current-year period. Various factors contributed to this decrease, including higher operations and maintenance expenses, the effects of weather on retail sales, and lower sales by our real estate subsidiary resulting from the weak real estate market.
Additional details of these and other factors that increased (decreased) net income for the nine-month period ended September 30, 2008 compared with the prior-year period are contained in the following table (dollars in millions):

                                                                       Increase (Decrease)
                                                                    Pretax           After Tax
Regulated electricity segment:
Impacts of retail rate increase effective July 1, 2007 and
transmission rate increases:
Retail revenue increase primarily related to higher Base
Fuel Rate                                                         $      156         $       95
Decreased deferred fuel and purchased power costs related to
higher Base Fuel Rate                                                   (141 )              (86 )
Transmission rate increases (including related retail rates)              22                 13
Regulatory disallowance in 2007                                           14                  8
Higher retail sales primarily due to customer growth,
excluding weather effects                                                 22                 13
Increased revenues, net of fuel and purchased power costs,
related to long-term traditional wholesale contracts                       8                  5
Effects of weather on retail sales                                       (42 )              (26 )
Operations and maintenance expense increases primarily due
to:
Increased customer service and other costs, including
distribution system reliability                                          (41 )              (25 )
Increased generation costs, including more planned
maintenance and overhauls                                                (27 )              (16 )
Higher depreciation and amortization primarily due to higher
plant balances                                                           (15 )               (9 )
Lower taxes other than income taxes primarily due to
decreased property tax assessments                                        10                  6
Higher other expense net of income, primarily due to losses
on investments                                                            (9 )               (5 )
Income tax benefits related to prior years resolved in 2008                -                 30
Income tax benefits related to prior years resolved in 2007                -                (13 )
Miscellaneous items, net                                                   7                  5

Decrease in regulated electricity segment net income                     (36 )               (5 )
Lower real estate segment income from continuing operations
primarily due to lower land parcel and home sales resulting
from the weak real estate market                                         (36 )              (22 )
Lower marketing and trading contribution primarily due to
lower sales volumes                                                      (24 )              (15 )
Other miscellaneous items, net                                            10                  5

Decrease in income from continuing operations                     $      (86 )              (37 )

Increase in real estate segment income from discontinued
operations primarily related to a commercial property sale                                   14

Decrease in net income                                                               $      (23 )

Regulated Electricity Segment Revenues
Regulated electricity segment revenues were $202 million higher for the nine months ended September 30, 2008 compared with the prior-year period primarily because of:
• a $156 million increase in retail revenues due to a rate increase effective July 1, 2007;

• a $35 million increase in revenues from Off-System Sales due to higher prices and volumes;

• a $33 million increase in retail revenues primarily related to customer growth, excluding weather effects;

• a $22 million increase due to transmission rate increases (including related retail rates);

• a $19 million increase in revenues related to long-term traditional wholesale contracts;

• a $10 million increase in renewable energy surcharges offset in operations and maintenance expense;

• a $60 million decrease in retail revenue due to the effects of weather;

• a $40 million decrease in retail revenues related to recovery of PSA deferrals, which had no earnings effect because of lower amortization of the same amount recorded as fuel and purchased power expense; and

• a $27 million net increase due to miscellaneous factors.

Real Estate Segment Revenues
Real estate segment revenues were $68 million lower for the nine months ended September 30, 2008 compared with the prior-year period primarily due to lower land parcel and home sales as a result of the weak real estate market. All Other Revenues
All other revenues were $154 million lower for the nine months ended September 30, 2008 compared with the prior-year period primarily due to planned reductions of APSES' retail commodity-related energy services and other marketing and trading activities.

          PINNACLE WEST CONSOLIDATED - LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
     The following table presents net cash provided by (used for) operating,
investing and financing activities for the nine months ended September 30, 2008
and 2007 (dollars in millions):

                                                                 Nine Months Ended
                                                                   September 30,
                                                                  2008         2007
  Net cash flow provided by operating activities               $    784      $  477
  Net cash flow used for investing activities                      (597 )      (678 )
  Net cash flow provided by (used for) financing activities        (139 )       157

The increase of approximately $307 million in net cash provided by operating activities is primarily due to lower real estate investments resulting from the weak real estate market; increased collateral

and margin cash collected as a result of changes in commodity prices; lower current income taxes; increased retail revenue related to higher Base Fuel Rates; and changes in working capital.
The decrease of approximately $81 million in net cash used for investing activities is primarily due to a real estate commercial property sale in 2008 and lower levels of capital expenditures (see table and discussion below), partially offset by lower cash proceeds from the net sales and purchases of investments.
The increase of approximately $296 million in net cash used for financing activities is primarily due to lower levels of short-term debt as a result of higher cash from operations and lower levels of long-term debt as a result of the proceeds from the sale of a real estate commercial property in 2008. Liquidity
Capital Expenditure Requirements
The following table summarizes the actual capital expenditures for the nine months ended September 30, 2007 and 2008 and estimated capital expenditures, net of contributions in aid of construction, for the next three years:

                              CAPITAL EXPENDITURES
                             (dollars in millions)

                           Nine Months Ended            Estimated for the Year Ended
                             September 30,                      December 31,
                           2007           2008         2008             2009        2010
        APS
        Distribution     $     306       $  258     $       370       $    270      $ 260
        Generation (a)         259          244             370            330        310
        Transmission            97          109             180            260        100
        Other (b)               10           22              40             40         40

        Subtotal               672          633             960            900        710
        SunCor (c)             132           36              40             20         70
        Other                    2            7              10              5         30

        Total            $     806       $  676     $     1,010       $    925      $ 810

(a) Generation includes nuclear fuel expenditures of approximately $90 million to $120 million per year for 2008, 2009 and 2010.

(b) Primarily information systems and facilities projects.

(c) Primarily capital expenditures for residential, land development and retail and office building construction reflected in "Expenditures for real estate investments" and "Capital expenditures" on the Condensed Consolidated Statements of Cash Flows.

Distribution and transmission capital expenditures are comprised of 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 power lines, substations, line extensions to new residential and commercial developments and upgrades to customer information systems, partially offset by contributions in aid of construction in accordance with APS' line extension policy. See "Line Extension

Schedule" in Note 3 of the 2007 Form 10-K for details regarding changes in early 2008 to the line extension policy.
Generation capital expenditures are comprised of various improvements to APS' existing fossil and nuclear plants. 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. Environmental expenditures differ for each of the years 2008, 2009 and 2010, with the lowest year estimated at approximately $30 million, and the highest year estimated at approximately $100 million. We are also monitoring the status of certain environmental matters, which, depending on their final outcome, could require modification to our environmental expenditures. (See "Business of Arizona Public Service Company - Environmental Matters - Regional Haze Rules" in Item 1 of the 2007 Form 10-K and "Environmental Matters - Mercury" in Part II, Item 5 below.)
In early 2008, we announced and began implementing a cost reduction effort that included the elimination of approximately $200 million of capital expenditures for the years 2008-2012. These capital expenditure reductions, as they relate to the years 2008 - 2010, are reflected in the estimates provided above. In addition, we recently announced and completed a capital expenditure reduction analysis due primarily to our reduced customer growth outlook as well as the deferral of upgrades and other capital projects. Anticipated capital expenditure reductions in distribution (net of amounts for projected line extensions), transmission and general plant under this program exceed $500 million over the years 2009 - 2011. These capital expenditure reductions, as they relate to the years 2008 - 2010, are reflected in the estimates provided above. (See "Pinnacle West Consolidated - Factors Affecting Our Financial Outlook - Customer and Sales Growth" below for additional information on our growth outlook.)
Capital expenditures will be funded with internally generated cash and/or external financings, which may include issuances of long-term debt and Pinnacle West common stock.
Pinnacle West (Parent Company)
Our primary cash needs are for dividends to our shareholders and principal and interest payments on our long-term debt. The level of our common stock dividends and future dividend growth will be dependent on a number of factors including, but not limited to, our outlook for future business prospects, payout ratio trends, free cash flow and financial market conditions.
Our primary sources of cash are dividends from APS, external debt and equity financings and cash distributions from our other subsidiaries, primarily SunCor. An existing ACC order requires APS to maintain a common equity ratio of at least 40% and prohibits APS from paying common stock dividends if the payment would reduce its common equity below that threshold. As defined in the ACC order, the common equity ratio is common equity divided by the sum of common equity and long-term debt, including current maturities of long-term debt. At September 30, 2008, APS' common equity ratio, as defined, was approximately 55%.
The credit and liquidity markets experienced significant stress beginning the week of September 15, 2008. Pinnacle West and APS have been able to access existing credit facilities, ensuring adequate liquidity. Cash on hand is being invested in money market funds consisting of U.S. Treasury and government agency securities and repurchase agreements collateralized fully by U.S. Treasury and government agency securities.
Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and our subsidiaries. IRS regulations require us to contribute a minimum amount to the qualified plan. We contribute at least the minimum amount required under IRS regulations, but no more than the maximum tax-deductible

amount. The minimum required funding takes into consideration the value of plan assets and our pension obligation. The assets in the plan are comprised of fixed-income, equity and short-term investments. Future year contribution amounts are dependent on plan asset performance and plan actuarial assumptions. We contributed approximately $52 million in 2007. We made a $35 million contribution to our pension plan in September 2008. Adjusted for this contribution, our plan was 94% funded on a cash-funded basis at plan year-end 2007, which is 2% over the minimum cash-funded status required by federal law under the Pension Protection Act of 2006. The expected contribution to our other postretirement benefit plans in 2008 is estimated to be approximately $11 million, of which $10 million has been contributed through October 2008. APS and other subsidiaries fund their share of the contributions. APS' share is approximately 96% of both plans.
On October 22, 2008, the Pinnacle West Board of Directors declared a quarterly dividend of $0.525 per share of common stock, payable on December 1, 2008, to shareholders of record on November 3, 2008.
Pinnacle West has a $300 million revolving credit facility that terminates in December 2010. Credit commitments totaling approximately $17 million from Lehman Brothers are no longer available due to its September 2008 bankruptcy filing. The remaining $283 million revolver is available to support the issuance of up to $250 million in commercial paper or to be used as bank borrowings, including issuances of letters of credit. At September 30, 2008, Pinnacle West had outstanding $127 million of borrowings under its revolving credit facility, approximately $7 million of letters of credit and $40 million of commercial paper. Pinnacle West had remaining capacity available under its revolver of approximately $109 million and had cash and investments of approximately $19 million.
See "Equity Infusion Approval" in Note 5 for information regarding Pinnacle West's approval from the ACC regarding a potential equity infusion into APS of up to $400 million.
APS
APS' capital requirements consist primarily of capital expenditures and mandatory redemptions of long-term debt. APS pays for its capital requirements . . .