Pinnacle West Capital (PNW) 8-K Pinnacle West Reports 2010 Fourth-quarter and Full-year Results

Exhibit 99.4

Last Updated
2/18/11

Pinnacle West Capital Corporation
Earnings Variance Explanations
For the Three-Month and Twelve-Month Periods Ended December 31, 2010 and 2009

The following discussion includes the earnings variance explanations for Pinnacle West Capital Corporation (“Pinnacle West”) for the three months and twelve months ended December 31, 2010 and 2009. We suggest that this discussion be read in connection with the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2010. Additional operating and financial statistics and a glossary of terms are available on our website (www.pinnaclewest.com).

RESULTS OF OPERATIONS

Pinnacle West’s reportable business segment is our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electricity service to Native Load customers) and related activities and includes electricity generation, transmission and distribution.

Our reportable business segments reflect a change from previously reported information. As of December 31, 2010, our real estate activities are no longer considered a segment requiring separate reporting or disclosure. In 2009 our real estate subsidiary, SunCor, began disposing of its homebuilding operations, master-planned communities, land parcels, commercial assets and golf courses in order to reduce its outstanding debt (see Note 23). At December 31, 2010, SunCor had total remaining assets of about $16 million, which includes approximately $3 million of assets held for sale. Additionally, all of SunCor’s operations are reflected in discontinued operations.

Operating Results — Three-month period ended December 31, 2010 compared with three-month period ended December 31, 2009

Our consolidated net income attributable to common shareholders for the three months ended December 31, 2010 was $7 million, compared with a net loss of $30 million for the comparable prior-year period. The $37 million variance consists of a $23 million increase in income from continuing operations and a $14 million increase from discontinued operations (primarily real estate activities). As discussed in greater detail below, the improved results reflect an increase of approximately $20 million in regulated electricity segment net income primarily due to increased revenues related to APS’s retail rate increases, partially offset by increased operating expenses.

Last Updated
2/18/11

The following table presents net income (loss) attributable to common shareholders by business segment compared with the prior-year period:

	Three Months Ended
	December 31,
	2010			2009			Net Change
	(dollars in millions)
Regulated Electricity Segment:
Operating revenues less fuel and purchased power expenses	$	428		$	392		$	36
Operations and maintenance		(231	)		(219	)		(12	)
Depreciation and amortization		(107	)		(103	)		(4	)
Taxes other than income taxes		(34	)		(22	)		(12	)
Other income (expenses), net		2			(3	)		5
Interest charges, net of allowance for funds used during construction		(52	)		(55	)		3
Income taxes		5			1			4
Noncontrolling interests (Note 7)		(5	)		(5	)		—
Regulated electricity segment net income (loss)		6			(14	)		20
All other (a)		1			(2	)		3
Income (Loss) from Continuing Operations Attributable to Common Shareholders		7			(16	)		23
Loss from Discontinued Operations Attributable to Common Shareholders (primarily real estate impairment charges at SunCor)		—			(14	)		14
Net Income (Loss) Attributable to Common Shareholders	$	7		$	(30	)	$	37

(a) Includes activities related to APSES and El Dorado. None of the activities of either of these companies constitutes a reportable segment.

Regulated electricity segment

This section includes a discussion of major variances in income and expense amounts for the regulated electricity segment.

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Last Updated
2/18/11

Operating revenues less fuel and purchased power expensesRegulated electricity segment operating revenues less fuel and purchased power expenses were $36 million higher for the three months ended December 31, 2010 compared with the prior-year period. The following table describes the major components of this change:

	Increase (Decrease)
				Fuel and
				purchased
	Operating			power
	revenues			expenses			Net change
	(dollars in millions)
Retail regulatory settlement effective January 1, 2010:
Retail base rate increases, net of deferrals	$	54		$	28		$	26
Line extension revenues (Note 3)		4						4
Transmission rate decreases		(2	)					(2	)
Higher demand-side management and renewable energy surcharges (substantially offset in operations and maintenance expense)		7			1			6
Effects of weather on retail sales		7			2			5
Lower fuel and purchased power costs including the effects of higher off-system sales, net of related PSA deferrals		4			(2	)		6
Lower retail revenues related to recovery of PSA deferrals, substantially offset by lower amortization of fuel and purchased power expense		(58	)		(59	)		1
Lower retail sales primarily due to lower usage per customer, including the effects of the Company’s energy efficiency programs, but excluding the effects of weather		(9	)		(2	)		(7	)
Miscellaneous items, net		(4	)		(1	)		(3	)
Total	$	3		$	(33	)	$	36

Operations and maintenanceOperations and maintenance expenses increased $12 million for the three months ended December 31, 2010 compared with the prior-year period primarily because of:

• An increase of $5 million related to demand-side management and renewable energy programs, which are primarily offset in operating revenues;

• An increase of $6 million related to employee benefits costs; and

• An increase of $1 million due to other miscellaneous factors.

Taxes other than income taxesTaxes other than income taxes increased $12 million for the three months ended December 31, 2010 compared with the prior-year period primarily because of higher property tax rates in the current year.

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Last Updated
2/18/11

Income taxesIncome taxes were $4 million lower for the three months ended December 31, 2010 compared with the prior year primarily because of $4 million of income tax benefits related to prior years that were resolved in the current year and $2 million of income tax benefits related to the extension of the Federal R&D credit, partially offset by higher pretax income in the current-year period.

Discontinued Operations

Real estate activitiesAs of December 31, 2010, all of SunCor’s operations have been reclassified to discontinued operations. The income from discontinued operations related to real estate activities was $14 million higher for the three months ended December 31, 2010 compared with the prior-year period primarily because of real estate impairment charges recorded in the prior-year period.

Operating Results — 2010 compared with 2009

Our consolidated net income attributable to common shareholders for 2010 was $350 million, compared with $68 million for the comparable prior-year period. The improved results were primarily due to lower real estate impairment charges recorded in 2010 compared with the prior-year period by SunCor.

In addition, regulated electricity segment net income increased approximately $82 million from the prior-year period due to increased revenues related to APS’s retail rate increases and other factors. Our consolidated results for 2010 also include a gain of $25 million after income taxes related to the sale of APSES’ district cooling business.

4

Last Updated
2/18/11

The following table presents net income (loss) attributable to common shareholders by business segment compared with the prior-year period:

	Year Ended
	December 31,
	2010			2009			Net Change
	(dollars in millions)
Regulated Electricity Segment:
Operating revenues less fuel and purchased power expenses	$	2,134		$	1,970		$	164
Operations and maintenance		(870	)		(822	)		(48	)
Depreciation and amortization		(415	)		(407	)		(8	)
Taxes other than income taxes		(135	)		(123	)		(12	)
Other income (expenses), net		(4	)		(2	)		(2	)
Interest charges, net of allowance for funds used during construction		(204	)		(212	)		8
Income taxes		(161	)		(142	)		(19	)
Noncontrolling interests (Note 20)		(20	)		(19	)		(1	)
Regulated electricity segment net income		325			243			82
All other (a)		5			(10	)		15
Income from Continuing Operations Attributable to Common Shareholders		330			233			97
Discontinued real estate activities, primarily impairment charges at SunCor (Note 23)		(6	)		(167	)		161
All other discontinued operations (b)		26			2			24
Income (Loss) from Discontinued Operations Attributable to Common Shareholders		20			(165	)		185
Net Income Attributable to Common Shareholders	$	350		$	68		$	282

(a)	Includes activities related to APSES and El Dorado. None of the activities of either of these companies constitutes a reportable segment.
(b)	Income from discontinued operations for 2010 includes a gain of $25 million after income taxes related to the sale of APSES’ district cooling business

Regulated electricity segment

This section includes a discussion of major variances in income and expense amounts for the regulated electricity segment.

5

Last Updated
2/18/11

Operating revenues less fuel and purchased power expensesRegulated electricity segment operating revenues less fuel and purchased power expenses were $164 million higher for the year ended 2010 compared with the prior year. The following table describes the major components of this change:

	Increase (Decrease)
				Fuel and
				purchased
	Operating			power
	revenues			expenses			Net change
	(dollars in millions)
Retail regulatory settlement effective January 1, 2010:
Retail base rate increases, net of deferrals	$	269		$	128		$	141
Line extension revenues (Note 3)		19						19
Transmission rate increases		6						6
Higher demand-side management and renewable energy surcharges (substantially offset in operations and maintenance expense)		33			2			31
Higher fuel and purchased power costs offset by the effects of higher off-system sales, net of related PSA deferrals		28			26			2
Lower retail revenues related to recovery of PSA deferrals, substantially offset by lower amortization of fuel and purchased power expense		(270	)		(276	)		6
Lower retail sales primarily due to lower usage per customer, including the effects of the Company’s energy efficiency programs, but excluding the effects of weather		(28	)		(9	)		(19	)
Effects of weather on retail sales, primarily due to milder weather in the second quarter 2010		(20	)		(6	)		(14	)
Miscellaneous items, net		(5	)		3			(8	)
Total	$	32		$	(132	)	$	164

Operations and maintenanceOperations and maintenance expenses increased $48 million for the year ended 2010 compared with the prior year primarily because of:

• An increase of $25 million related to demand-side management and renewable energy programs, which are primarily offset in operating revenues;

• An increase of $18 million related to employee benefits costs; and

• An increase of $5 million related to other miscellaneous factors.

Depreciation and AmortizationDepreciation and amortization expenses were $8 million higher for the year ended 2010 compared with the prior year primarily because of increased plant in service partially offset by lower depreciation rates.

6

Last Updated
2/18/11

Taxes other than income taxesTaxes other than income taxes increased $12 million for the year ended 2010 compared with the prior year primarily because of higher property tax rates in the current year.

Interest charges, net of allowance for funds used during constructionInterest charges, net of allowance for funds used during construction, decreased $8 million for the year ended 2010 compared with the prior year primarily because of higher rates in the current year for the allowance for equity and borrowed funds used during construction, partially offset by higher interest charges due to higher debt balances. Interest charges, net of allowance for funds used during construction are comprised of the regulated electricity segment portions of the line items interest expense and allowance for equity and borrowed funds used during construction from the Consolidated Statements of Income.

Income taxesIncome taxes were $19 million higher for the year ended 2010 compared with the prior year primarily because of higher pretax income in the current-year period, partially offset by $17 million of income tax benefits related to prior years that were resolved in the current year. See Note 4.

All other

All other revenues increased $56 million partially offset by increased other expenses of $41 million resulting primarily from improved margins from APSES’ products and services business. In addition, other income was higher due to investment losses at El Dorado in 2009.

Discontinued Operations

Real estate activitiesDuring the first quarter of 2009, SunCor’s Board of Directors authorized a series of strategic transactions to dispose of SunCor’s assets. This decision resulted in impairment charges of approximately $161 million after income taxes in 2009. As of December 31, 2010, all of SunCor’s operations have been reclassified to discontinued operations (see Note 22). The after-tax impacts of the $6 million loss from real estate activities for the year ended 2010 includes real estate impairment charges of approximately $10 million (see Note 23) and other costs of $6 million, partially offset by a gain from debt restructuring of approximately $10 million (see Note 6).

All otherAll other earnings from discontinued operations were $24 million higher for the year ended 2010 compared to the prior-year period primarily because of a gain of $25 million after income taxes related to the sale of APSES’ district cooling business in 2010.

7

PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)

	THREE MONTHS ENDED
	DECEMBER 31,						Increase (Decrease)
	2010			2009			Amount			Percent
Operating Revenues
Regulated electricity segment	$	653,626		$	650,349		$	3,277			0.5	% B
Other revenues		29,985			10,559			19,426			184.0	% B
Total		683,611			660,908			22,703			3.4	% B
Operating Expenses
Regulated electricity segment fuel and purchased power		225,571			257,990			(32,419	)		12.6	% B
Operations and maintenance		232,991			221,462			11,529			5.2	% W
Depreciation and amortization		106,691			103,397			3,294			3.2	% W
Taxes other than income taxes		34,398			22,489			11,909			53.0	% W
Other expenses		24,642			8,672			15,970			184.2	% W
Total		624,293			614,010			10,283			1.7	% W
Operating Income		59,318			46,898			12,420			26.5	% B
Other
Allowance for equity funds used during construction		5,649			3,080			2,569			83.4	% B
Other income		2,540			1,176			1,364			116.0	% B
Other expense		(1,114	)		(5,382	)		4,268			79.3	% B
Total		7,075			(1,126	)		8,201			728.3	% B
Interest Expense
Interest charges		62,237			60,080			2,157			3.6	% W
Allowance for borrowed funds used during construction		(4,225	)		(2,112	)		(2,113	)		100.0	% B
Total		58,012			57,968			44			0.1	% W
Income (Loss) From Continuing Operations Before Income Taxes		8,381			(12,196	)		20,577			168.7	% B
Income Taxes		(3,822	)		(1,088	)		(2,734	)		251.3	% B
Income (Loss) From Continuing Operations		12,203			(11,108	)		23,311			209.9	% B
Income (Loss) From Discontinued Operations
Net of Income Taxes		298			(13,927	)		14,225			102.1	% B
Net Income (Loss)		12,501			(25,035	)		37,536			149.9	% B
Less: Net income attributable to noncontrolling interests		5,151			5,124			27			0.5	% W
Net Income (Loss) Attributable To Common Shareholders	$	7,350		$	(30,159	)	$	37,509			124.4	% B
Weighted-Average Common Shares Outstanding — Basic		108,730			101,320			7,410			7.3	%
Weighted-Average Common Shares Outstanding — Diluted		109,224			101,320			7,904			7.8	%
Earnings Per Weighted-Average Common Share Outstanding
Income (loss) from continuing operations attributable to common shareholders — basic	$	0.07		$	(0.16	)	$	0.23			143.8	% B
Net income (loss) attributable to common shareholders — basic	$	0.07		$	(0.30	)	$	0.37			123.3	% B
Income (loss) from continuing operations attributable to common shareholders — diluted	$	0.06		$	(0.16	)	$	0.22			137.5	% B
Net income (loss) attributable to common shareholders — diluted	$	0.07		$	(0.30	)	$	0.37			123.3	% B
Amounts Attributable To Common Shareholders
Income (loss) from continuing operations, net of tax	$	7,074		$	(16,063	)	$	23,137			144.0	% B
Discontinued operations, net of tax		276			(14,096	)		14,372			102.0	% B
Net income (loss) attributable to common shareholders	$	7,350		$	(30,159	)	$	37,509			124.4	% B

B —	Better
W —	Worse

PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)

	TWELVE MONTHS ENDED
	DECEMBER 31,						Increase (Decrease)
	2010			2009			Amount			Percent
Operating Revenues
Regulated electricity segment	$	3,180,678		$	3,149,187		$	31,491			1.0	% B
Other revenues		82,967			26,723			56,244			210.5	% B
Total		3,263,645			3,175,910			87,735			2.8	% B
Operating Expenses
Regulated electricity segment fuel and purchased power		1,046,815			1,178,620			(131,805	)		11.2	% B
Operations and maintenance		877,406			831,863			45,543			5.5	% W
Depreciation and amortization		414,555			407,463			7,092			1.7	% W
Taxes other than income taxes		135,334			123,277			12,057			9.8	% W
Other expenses		65,651			24,534			41,117			167.6	% W
Total		2,539,761			2,565,757			(25,996	)		1.0	% B
Operating Income		723,884			610,153			113,731			18.6	% B
Other
Allowance for equity funds used during construction		22,066			14,999			7,067			47.1	% B
Other income		6,368			5,278			1,090			20.7	% B
Other expense		(9,764	)		(14,269	)		4,505			31.6	% B
Total		18,670			6,008			12,662			210.8	% B
Interest Expense
Interest charges		244,174			237,527			6,647			2.8	% W
Allowance for borrowed funds used during construction		(16,539	)		(10,430	)		(6,109	)		58.6	% B
Total		227,635			227,097			538			0.2	% W
Income From Continuing Operations Before Income Taxes		514,919			389,064			125,855			32.3	% B
Income Taxes		164,321			136,506			27,815			20.4	% W
Income From Continuing Operations		350,598			252,558			98,040			38.8	% B
Income (Loss) From Discontinued Operations
Net of Income Taxes		19,611			(179,794	)		199,405			110.9	% B
Net Income		370,209			72,764			297,445			408.8	% B
Less: Net income attributable to noncontrolling interests		20,156			4,434			15,722			354.6	% W
Net Income Attributable To Common Shareholders	$	350,053		$	68,330		$	281,723			412.3	% B
Weighted-Average Common Shares Outstanding — Basic		106,573			101,161			5,412			5.3	%
Weighted-Average Common Shares Outstanding — Diluted		107,138			101,264			5,874			5.8	%
Earnings Per Weighted-Average Common Share Outstanding
Income from continuing operations attributable to common shareholders — basic	$	3.10		$	2.31		$	0.79			34.2	% B
Net income attributable to common shareholders — basic	$	3.28		$	0.68		$	2.60			382.4	% B
Income from continuing operations attributable to common shareholders — diluted	$	3.08		$	2.30		$	0.78			33.9	% B
Net income attributable to common shareholders — diluted	$	3.27		$	0.67		$	2.60			388.1	% B
Amounts Attributable To Common Shareholders
Income from continuing operations, net of tax	$	330,435		$	233,349		$	97,086			41.6	% B
Discontinued operations, net of tax		19,618			(165,019	)		184,637			111.9	% B
Net Income attributable to common shareholders	$	350,053		$	68,330		$	281,723			412.3	% B

B —	Better
W —	Worse