Exhibit 99.7
Last updated July 27, 2005
PINNACLE WEST CAPITAL CORPORATION
EARNINGS VARIANCE EXPLANATIONS
FOR THE PERIODS ENDED JUNE 30, 2005 AND 2004
This discussion explains the changes in our consolidated earnings for the
three-month and six-month periods ended June 30, 2005 and 2004. Condensed
Consolidated Statements of Income for the three months and six months ended June
30, 2005 and 2004 follow this discussion. We will file our Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2005 on or before August 9,
2005. We suggest that this discussion be read in connection with the Pinnacle
West Capital Corporation Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 and the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2005. Additional operating and financial statistics and a glossary of
terms are available on our website (www.pinnaclewest.com).
EARNINGS CONTRIBUTION BY BUSINESS SEGMENT
We have three principal business segments (determined by products,
services and the regulatory environment):
- 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.
- our marketing and trading segment, which consists of our competitive
energy business activities, including wholesale marketing and
trading and APS Energy Services' commodity-related energy services;
and
- our real estate segment, which consists of SunCor's real estate
development and investment activities.
The following table summarizes net income for the three months and six
months ended June 30, 2005 and 2004 (dollars in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
------ ------ ------ ------
Regulated electricity $ 69 $ 40 $ 83 $ 55
Marketing and trading 4 8 11 22
Real estate 11 4 19 5
Other (a) 1 22 2 23
------ ------ ------ ------
Income from continuing operations 85 74 115 105
Silverhawk discontinued operations -
net of income taxes (see "Pending
Sale of Silverhawk" below) (59) (2) (65) (3)
Real estate discontinued operations -
net of income taxes 1 - 1 1
Other segment discontinued
operations- net of income taxes - 1 - 1
------ ------ ------ ------
Net income $ 27 $ 73 $ 51 $ 104
====== ====== ====== ======
(a) The 2004 periods include $21 million (after-tax) related to the sale of
El Dorado's limited partnership interest in the Phoenix Suns.
GENERAL
Throughout the following explanations of our results of operations, we
refer to "gross margin." With respect to our regulated electricity segment and
our marketing and trading segment, gross margin refers to electric operating
revenues less purchased power and fuel costs. "Gross margin" is a "non-GAAP
financial measure," as defined in accordance with SEC rules. Exhibit 99.10
reconciles this non-GAAP financial measure to operating income, which is the
most directly comparable financial measure calculated and presented in
accordance with GAAP. We view gross margin as an important performance measure
of the core profitability of our operations. This measure is a key component of
our internal financial reporting and is used by our management in analyzing our
business segments. We believe that investors benefit from having access to the
same financial measures that our management uses. In addition, we have
reclassified certain prior-period amounts to conform to our current-period
presentation.
PENDING SALE OF SILVERHAWK POWER STATION
In June 2005, we entered into an agreement to sell our 75% interest in the
Silverhawk Power Station to Nevada Power Company. Closing of the sale is subject
to regulatory approvals, including approval by the Nevada Public Utilities
Commission and the Federal Energy Regulatory Commission, which are expected to
occur by this fall. As a result of this pending sale, we recorded an after-tax
loss from discontinued operations of approximately $55 million. We
have also reclassified Silverhawk operations in the current and prior periods to
discontinued operations.
DEFERRED PURCHASED POWER AND FUEL COSTS
APS' retail rate case settlement became effective April 1, 2005. As part
of the settlement, the ACC approved a 4.2% annual retail rate increase and a
power supply adjustor ("PSA") that provides mechanisms for adjusting rates to
reflect variations in fuel
2
and purchased power costs. In accordance with the PSA, APS defers for future
rate recovery 90% of the difference between actual purchased power and fuel
costs and the amount for such costs currently included in base rates. As of June
30, 2005, APS had deferred $34 million of pretax purchased power and fuel costs.
OPERATING RESULTS - THREE-MONTH PERIOD ENDED JUNE 30, 2005 COMPARED WITH
THREE-MONTH PERIOD ENDED JUNE 30, 2004
Our consolidated net income for the three months ended June 30, 2005 was
$27 million compared with $73 million for the prior-year period. The
current-quarter net income included a loss from discontinued operations of $58
million which is primarily related to the pending sale and operations of
Silverhawk (see discussion above). Income from continuing operations increased
$11 million in the period-to-period comparison reflecting the following changes
in earnings by segment:
- Regulated Electricity Segment - Income from continuing operations
increased approximately $29 million primarily due to a retail price
increase effective April 1, 2005, higher retail sales volumes due to
customer growth, the absence of regulatory asset amortization,
deferred purchased power and fuel costs, net of higher costs, in
accordance with the retail rate settlement, and lower depreciation
due to lower depreciation rates. These positive factors were
partially offset by higher operations and maintenance costs
primarily related to generation, customer service, and benefit
costs.
- Marketing and Trading Segment - Income from continuing operations
decreased approximately $4 million primarily due to lower realized
margins on wholesale sales.
- Real Estate Segment - Income from continuing operations increased
approximately $7 million primarily due to increased parcel sales.
- Other Segment - Income from continuing operations decreased
approximately $21 million primarily due to an after-tax gain related
to the sale of El Dorado's limited partnership interest in the
Phoenix Suns recorded in the prior-year period.
3
Additional details on the major factors that increased (decreased) net income
are contained in the following table (dollars in millions).
Increase (Decrease)
----------------------
Pretax After Tax
------ ---------
Regulated electricity segment gross margin:
Retail price increase effective April 1, 2005 $ 28 $ 17
Higher retail sales volumes due to customer growth,
excluding weather effects 13 8
Deferred purchased power and fuel costs, net of higher
costs, in accordance with the retail rate
settlement 8 5
Miscellaneous items, net 2 1
------ -----
Net increase in regulated electricity segment gross
margin 51 31
------ -----
Marketing and trading segment gross margin:
Lower realized margins on wholesale sales primarily
due to lower unit margins and lower sales volumes (6) (4)
Miscellaneous items, net (3) (1)
------ -----
Net decrease in marketing and trading segment
gross margin (9) (5)
------ -----
Net increase in gross margin for regulated electricity
and marketing and trading segments 42 26
Higher real estate segment contribution primarily related to
increased parcel sales 12 7
Lower other income due to sale of limited partnership interest
in Phoenix Suns recorded in prior-year period (35) (21)
Higher operation and maintenance expense due to generation,
customer service and benefit costs (15) (9)
Depreciation and amortization decreases primarily due to:
Absence of regulatory asset amortization 10 6
Lower depreciation rates partially offset by higher
depreciable assets 7 4
Higher interest expense, net of capitalized financing
costs, primarily due to higher debt balances
and interest rates (6) (4)
Miscellaneous items, net 6 2
------ -----
Net increase in income from continuing operations $ 21 11
======
Discontinued operations primarily related to the pending
sale of Silverhawk (see discussion above) (57)
-----
Net decrease in net income $ (46)
=====
REGULATED ELECTRICITY SEGMENT REVENUES
Regulated electricity segment revenues were $60 million higher for the
three months ended June 30, 2005 compared with the prior-year period primarily
as a result of:
- a $28 million increase in retail revenues due to a price increase
effective April 1, 2005;
4
- an $18 million increase in retail revenues related to customer
growth, excluding weather effects;
- a $12 million increase in Off-System Sales primarily due to sales
previously reported in the marketing and trading segment now
classified as sales in the regulated electricity segment in
accordance with the retail rate settlement; and
- a $2 million increase due to miscellaneous factors.
MARKETING AND TRADING SEGMENT REVENUES
Marketing and trading segment revenues were $39 million lower for the
three months ended June 30, 2005 compared with the prior-year period primarily
as a result of:
- a $25 million decrease in revenues from Off-System Sales primarily
due to lower sales volumes and sales previously reported in the
marketing and trading segment now classified as sales in the
regulated electricity segment in accordance with the retail rate
settlement;
- a $7 million decrease in energy trading revenues on realized sales
of electricity primarily due to lower delivered electricity prices
and lower sales volumes;
- a $5 million decrease from lower volumes and prices for competitive
retail sales in California; and
- a $2 million decrease on future mark-to-market gains due to higher
price volatility.
REAL ESTATE REVENUES
Real estate revenues were $19 million higher for the three months ended
June 30, 2005 compared with the prior-year period primarily due to increased
parcel sales.
OPERATING RESULTS - SIX-MONTH PERIOD ENDED JUNE 30, 2005 COMPARED WITH SIX-MONTH
PERIOD ENDED JUNE 30, 2004
Our consolidated net income for the six months ended June 30, 2005 was $51
million compared with $104 million for the prior-year period. The current year
period net income included a loss from discontinued operations of $64 million
which is primarily related to the pending sale and operations of Silverhawk (see
discussion above). Income from continuing operations increased $10 million in
the period-to-period comparison reflecting the following changes in earnings by
segment:
- Regulated Electricity Segment - Income from continuing operations
increased approximately $28 million primarily due to a retail price
increase effective April 1, 2005, higher retail sales volumes due to
customer growth, the absence of regulatory asset amortization,
deferred purchased power and fuel costs, net of higher costs, in
accordance with the retail rate settlement, and lower
5
depreciation due to lower depreciation rates. These positive factors
were partially offset by higher operations and maintenance costs
primarily related to generation, customer service, and benefit
costs, and higher property taxes due to increased plant in service.
- Marketing and Trading Segment - Income from continuing operations
decreased approximately $11 million primarily due to lower realized
margins on wholesale sales and competitive retail sales in
California.
- Real Estate Segment - Income from continuing operations increased
approximately $14 million primarily due to increased parcel sales.
- Other Segment - Income from continuing operations decreased
approximately $21 million primarily due to an after-tax gain related
to the sale of El Dorado's limited partnership interest in the
Phoenix Suns recorded in the prior-year period.
6
Additional details on the major factors that increased (decreased) net income
are contained in the following table (dollars in millions).
Increase (Decrease)
---------------------
Pretax After Tax
------ ---------
Regulated electricity segment gross margin:
Retail price increase effective April 1, 2005 $ 28 $ 17
Higher retail sales volumes due to customer growth,
excluding weather effects 20 12
Deferred purchased power and fuel costs, net of higher costs,
in accordance with the retail rate settlement 15 9
Miscellaneous items, net (1) (1)
------ -------
Net increase in regulated electricity segment gross margin 62 37
------ -------
Marketing and trading segment gross margin:
Lower unit margins on competitive retail sales in California (7) (4)
Lower realized margins on wholesale sales primarily
due to lower unit margins and lower sales volumes (5) (3)
Miscellaneous items, net 1 -
------ -------
Net decrease in marketing and trading segment gross margin (11) (7)
------ -------
Net increase in gross margin for regulated electricity
and marketing and trading segments 51 30
Higher real estate segment contribution primarily related to
increased parcel sales 24 14
Lower other income due to sale of limited partnership interest in
Phoenix Suns recorded in the prior-year period (35) (21)
Operations and maintenance increases primarily due to:
Generation costs, including planned maintenance (11) (7)
Customer service costs, including planned maintenance (10) (6)
Benefit costs (8) (5)
Miscellaneous items, net (3) (2)
Depreciation and amortization decreases primarily due to:
Absence of regulatory asset amortization 19 11
Lower depreciation rates partially offset by higher
depreciable assets 8 5
Higher property taxes due to increased plant in service (7) (4)
Miscellaneous items, net (5) (5)
------ -------
Net increase in income from continuing operations $ 23 10
======
Discontinued operations primarily related to the pending
sale of Silverhawk (see discussion above) (63)
-------
Net decrease in net income $ (53)
=======
REGULATED ELECTRICITY SEGMENT REVENUES
Regulated electricity segment revenues were $60 million higher for the six
months ended June 30, 2005 compared with the prior-year period primarily as a
result of:
- a $28 million increase in retail revenues related to customer
growth, excluding weather effects;
- a $28 million increase in retail revenues due to a price increase
effective April 1, 2005;
7
- a $12 million increase in Off-System Sales primarily due to sales
previously reported in the marketing and trading segment now
classified as sales in the regulated electricity segment in
accordance with the retail rate settlement;
- a $9 million decrease in retail revenues related to milder weather;
and
- a $1 million increase due to miscellaneous factors.
MARKETING AND TRADING SEGMENT REVENUES
Marketing and trading segment revenues were $38 million lower for the six
months ended June 30, 2005 compared with the prior-year period primarily as a
result of:
- a $19 million decrease in revenues from Off-System Sales primarily
due to lower sales volumes, prices and sales previously reported in
the marketing and trading segment now classified as sales in the
regulated electricity segment in accordance with the retail rate
settlement;
- a $14 million decrease from lower volumes and prices on competitive
retail sales in California; and
- a $5 million decrease in energy trading revenues on realized sales
of electricity primarily due to lower delivered electricity prices
and lower volumes.
REAL ESTATE REVENUES
Real estate revenues were $40 million higher for the six months ended June
30, 2005 compared with the prior-year period primarily due to increased parcel
sales.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED
JUNE 30, Increase (Decrease)
2005 2004 Amount Percent
--------- --------- --------- ---------
OPERATING REVENUES
Regulated electricity segment $ 579,652 $ 519,929 $ 59,723 11.5% B
Marketing and trading segment 71,172 110,156 (38,984) 35.4% W
Real estate segment 84,753 66,084 18,669 28.3% B
Other revenues 20,259 9,414 10,845 115.2% B
--------- --------- ---------
Total 755,836 705,583 50,253 7.1% B
--------- --------- ---------
OPERATING EXPENSES
Regulated electricity segment purchased power and fuel 160,590 151,642 8,948 5.9% W
Marketing and trading segment purchased power and fuel 57,593 88,067 (30,474) 34.6% B
Operations and maintenance 153,097 138,595 14,502 10.5% W
Real estate segment operations 68,593 62,217 6,376 10.2% W
Depreciation and amortization 85,142 102,012 (16,870) 16.5% B
Taxes other than income taxes 34,638 32,308 2,330 7.2% W
Other expenses 17,556 7,575 9,981 131.8% W
--------- --------- ---------
Total 577,209 582,416 (5,207) 0.9% B
--------- --------- ---------
OPERATING INCOME 178,627 123,167 55,460 45.0% B
--------- --------- ---------
OTHER
Allowance for equity funds used during construction 2,952 2,184 768 35.2% B
Other income 8,684 36,496 (27,812) 76.2% W
Other expense (3,846) (3,371) (475) 14.1% W
--------- --------- ---------
Total 7,790 35,309 (27,519) 77.9% W
--------- --------- ---------
INTEREST EXPENSE
Interest charges 49,781 42,061 7,720 18.4% W
Capitalized interest (3,544) (2,681) (863) 32.2% B
--------- --------- ---------
Total 46,237 39,380 6,857 17.4% W
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 140,180 119,096 21,084 17.7% B
INCOME TAXES 55,024 45,028 9,996 22.2% W
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 85,156 74,068 11,088 15.0% B
LOSS FROM DISCONTINUED OPERATIONS
NET OF INCOME TAX BENEFIT (58,421) (1,428) (56,993) 3991.1% W
--------- --------- ---------
NET INCOME $ 26,735 $ 72,640 $ (45,905) 63.2% W
========= ========= =========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC 96,192 91,315 4,877 5.3%
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - DILUTED 96,299 91,400 4,899 5.4%
EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING
Income From Continuing Operations - Basic $ 0.89 $ 0.81 $ 0.08 9.9% B
Net Income - Basic $ 0.28 $ 0.80 $ (0.52) 65.0% W
Income From Continuing Operations - Diluted $ 0.88 $ 0.81 $ 0.07 8.6% B
Net Income - Diluted $ 0.28 $ 0.79 $ (0.51) 64.6% W
Certain prior-year amounts have been reclassified to conform to the 2005
presentation.
B -- Better
W -- Worse
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
SIX MONTHS ENDED
JUNE 30, Increase (Decrease)
2005 2004 Amount Percent
--------- --------- --------- -------
OPERATING REVENUES
Regulated electricity segment $ 995,682 $ 935,393 $ 60,289 6.4% B
Marketing and trading segment 160,429 198,840 (38,411) 19.3% W
Real estate segment 156,809 116,547 40,262 34.5% B
Other revenues 30,394 20,319 10,075 49.6% B
--------- --------- ---------
Total 1,343,314 1,271,099 72,215 5.7% B
--------- --------- ---------
OPERATING EXPENSES
Regulated electricity segment purchased power and fuel 239,013 240,253 (1,240) 0.5% B
Marketing and trading segment purchased power and fuel 128,402 155,832 (27,430) 17.6% B
Operations and maintenance 308,181 275,981 32,200 11.7% W
Real estate segment operations 125,069 109,510 15,559 14.2% W
Depreciation and amortization 176,535 203,115 (26,580) 13.1% B
Taxes other than income taxes 69,203 62,638 6,565 10.5% W
Other expenses 25,930 16,325 9,605 58.8% W
--------- --------- ---------
Total 1,072,333 1,063,654 8,679 0.8% W
--------- --------- ---------
OPERATING INCOME 270,981 207,445 63,536 30.6% B
--------- --------- ---------
OTHER
Allowance for equity funds used during construction 5,555 4,186 1,369 32.7% B
Other income 9,487 47,330 (37,843) 80.0% W
Other expense (8,232) (9,316) 1,084 11.6% B
--------- --------- ---------
Total 6,810 42,200 (35,390) 83.9% W
--------- --------- ---------
INTEREST EXPENSE
Interest charges 96,042 88,617 7,425 8.4% W
Capitalized interest (6,833) (4,180) (2,653) 63.5% B
--------- --------- ---------
Total 89,209 84,437 4,772 5.7% W
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 188,582 165,208 23,374 14.1% B
INCOME TAXES 73,685 60,439 13,246 21.9% W
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 114,897 104,769 10,128 9.7% B
LOSS FROM DISCONTINUED OPERATIONS
NET OF INCOME TAX BENEFIT (63,714) (703) (63,011) 8963.2% W
--------- --------- ---------
NET INCOME $ 51,183 $ 104,066 $ (52,883) 50.8% W
========= ========= =========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC 94,089 91,304 2,785 3.1%
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - DILUTED 94,189 91,391 2,798 3.1%
EARNINGS PER WEIGHTED-AVERAGE COMMON SHARE OUTSTANDING
Income From Continuing Operations - Basic $ 1.22 $ 1.15 $ 0.07 6.1% B
Net Income - Basic $ 0.54 $ 1.14 $ (0.60) 52.6% W
Income From Continuing Operations - Diluted $ 1.22 $ 1.15 $ 0.07 6.1% B
Net Income - Diluted $ 0.54 $ 1.14 $ (0.60) 52.6% W
Certain prior-year amounts have been reclassified to conform to the 2005
presentation.
B -- Better
W -- Worse