exv99w7

Exhibit 99.7

LAST UPDATED
7/26/07

Pinnacle West Capital Corporation

Earnings Variance Explanations

For the Three-Month and Six-Month Periods Ended June 30, 2007 and 2006

This discussion explains the changes in our consolidated net income for the three-month and six-month periods ended June 30, 2007 and 2006. Unaudited Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2007 and 2006 follow this discussion. We will file our Quarterly Report on Form 10-Q for the fiscal period ended June 30, 2007 on or before August 9, 2007. We suggest that this discussion be read in connection with the Pinnacle West Capital Corporation (“Pinnacle West”) Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Additional operating and financial statistics and a glossary of terms are available on our website (www.pinnaclewest.com).

EARNINGS CONTRIBUTION BY BUSINESS SEGMENT

Pinnacle West’s two principal 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 summarizes income from continuing operations by segment for the three months and six months ended June 30, 2007 and 2006 and reconciles net income in total (dollars in millions):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Regulated electricity	$	71	$	95	$	74	$	82
Real estate		—		8		8		30
Other (a)		8		8		12		10

Income from continuing operations		79		111		94		122
Discontinued operations — net of tax (b)		—		1		2		3

Net income	$	79	$	112	$	96	$	125


(a)		Primarily marketing and trading activity.

(b)		Primarily relates to sales of commercial properties.

PINNACLE WEST CONSOLIDATED — RESULTS OF OPERATIONS

General

Throughout the following explanations of our results of operations, we refer to “gross margin.” With respect to our regulated electricity segment, gross margin refers to operating revenues less fuel and purchased power 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 accounting principles generally accepted in the United States (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. We believe that investors benefit from having access to the same financial measures that our management uses.

Deferred Fuel and Purchased Power Costs

Our subsidiary, Arizona Public Service Company (“APS”), settled its 2003 general retail rate case effective April 1, 2005. As part of the settlement, the Arizona Corporation Commission (“ACC”) approved the Power Supply Adjustor (“PSA”), which permits APS to defer for recovery or refund fluctuations in retail fuel and purchased power costs, subject to specified parameters. In its June 28, 2007 general rate case order, the ACC modified the PSA in various respects, effective July 1, 2007. In accordance with the modified PSA, APS continues to defer for future rate recovery 90% of the difference between actual retail fuel and purchased power costs and the amount of such costs currently included in base rates, excluding certain costs. APS recovers PSA deferrals from its customers through the PSA, which is adjusted annually. See “APS General Rate Case and Power Supply Adjustor” in Item 8.01 of the Pinnacle West/APS Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 2007 for additional information about the ACC order and the PSA modifications.

The balance of APS’ PSA accumulated unrecovered deferrals at June 30, 2007 was approximately $137 million. APS expects to recover these deferrals through a combination of the PSA adjustor that took effect on February 1, 2007 and the temporary PSA surcharge discussed in the following paragraph. The recovery of PSA deferrals recorded as revenue is offset dollar-for-dollar by the amortization of those deferred expenses recorded as fuel and purchased power.

APS recorded PSA deferrals of (a) $45 million related to replacement power costs in 2005 associated with Palo Verde outages (the “2005 Deferrals”) and (b) $79 million related to replacement power costs in 2006 associated with outages or reduced power operations at Palo Verde (the “2006 Deferrals”). In its June 28, 2007 order, the ACC (a) disallowed approximately $14 million, including accrued interest ($8 million after income taxes), of the 2005 Deferrals and (b) approved APS’ recovery of the balance of the 2005 Deferrals (approximately $34 million, including accrued interest) through a temporary PSA surcharge over a twelve-month period effective July 1, 2007. The ACC’s prudence review of 2006 Palo Verde outage costs has not yet been completed. APS believes the 2006 Deferrals were prudently incurred and, therefore, are recoverable.

Operating Results — Three-month period ended June 30, 2007 compared with three-month period ended June 30, 2006

Our consolidated net income for the three months ended June 30, 2007 was $79 million compared with $112 million for the comparable prior-year period. Net income decreased $33 million in the period-to-period comparison, reflecting the following changes in earnings by segment:

	•		Regulated Electricity Segment — Net income decreased approximately $24 million primarily due to income tax credits related to prior years resolved in 2006; a regulatory disallowance (see “Deferred Fuel and Purchased Power Costs” above); higher operations and maintenance expense related to fossil generation costs; the effects of weather on retail sales; and higher interest expense, net of capitalized financing costs, due to higher debt balances and rates. These negative factors were partially offset by higher retail sales primarily due to customer growth. In addition, higher fuel and purchased power costs were partially offset by the deferral of such costs in accordance with the PSA. See “Deferred Fuel and Purchased Power Costs” above.

	•		Real Estate Segment — Net income decreased approximately $9 million primarily due to lower sales of residential property due to a slowdown in the western United States residential real estate markets.

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:
Higher fuel and purchased power costs due to increased prices	$	(27	)	$	(16	)
Increased deferred fuel and purchased power costs		26			16
Regulatory disallowance (see “Deferred Fuel and Purchased Power Costs” above)		(14	)		(8	)
Effects of weather on retail sales		(7	)		(4	)
Higher retail sales primarily due to customer growth and usage patterns, excluding weather effects		10			6
Miscellaneous items, net		4			1

Net decrease in regulated electricity segment gross margin		(8	)		(5	)
Lower real estate segment contribution primarily due to decreased sales of residential property		(15	)		(9	)
Operations and maintenance increases primarily due to:
Generation costs, including greater fossil power plant maintenance outages		(8	)		(5	)
Miscellaneous items, net		(1	)		(1	)
Higher depreciation and amortization primarily due to increased plant balances		(4	)		(2	)
Lower other income, net of expense, primarily due to miscellaneous asset sales in the prior-year period		(4	)		(2	)
Higher interest expense, net of capitalized financing costs, primarily due to higher debt balances and rates		(5	)		(3	)
Income tax credits related to prior years resolved in 2006		—			(10	)
Other miscellaneous items, net		2			4

Net decrease in net income	$	(43	)	$	(33	)

Regulated Electricity Segment Revenues

Regulated electricity segment revenues were $1 million lower for the three months ended June 30, 2007 compared with the prior-year period primarily as a result of:

	•		a $12 million decrease in Off-System Sales due to lower prices;

	•		a $9 million decrease in retail revenues due to weather;

	•		a $13 million increase in retail revenues primarily related to customer growth and usage patterns, excluding weather effects; and

	•		a $7 million increase due to miscellaneous factors.

Real Estate Segment Revenues

Real estate segment revenues were $64 million lower for the three months ended June 30, 2007 compared with the prior-year period primarily as a result of:

	•		a $56 million decrease in residential property sales due to a slowdown in the western United States residential real estate markets;

	•		a $4 million decrease in revenue primarily due to the timing of land parcel sales; and

	•		a $4 million decrease due to miscellaneous factors.

Operating Results — Six-month period ended June 30, 2007 compared with six-month period ended June 30, 2006

Our consolidated net income for the six months ended June 30, 2007 was $96 million compared with $125 million for the comparable prior-year period. Net income decreased $29 million in the period-to-period comparison, primarily reflecting the following changes in earnings by segment:

	•		Regulated Electricity Segment — Net income decreased approximately $8 million primarily due to income tax credits related to prior years resolved in 2006; a regulatory disallowance (see “Deferred Fuel and Purchased Power Costs” above); higher interest expense, net of capitalized financing costs, due to higher debt balances; lower other income, net of expense, primarily due to miscellaneous asset sales in the prior-year period and decreased interest income; and higher depreciation and amortization expense primarily due to increased plant asset balances. The negative factors were partially offset by higher retail sales primarily due to customer growth and the effects of weather on retail sales. In addition, higher fuel and purchased power costs were partially offset by the deferral of such costs in accordance with the PSA. See “Deferred Fuel and Purchased Power Costs” above.

	•		Real Estate Segment — Net income decreased approximately $22 million primarily due to lower sales of residential property due to a slowdown in the western United States residential real estate markets and the timing of land parcel sales.

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:
Higher fuel and purchased power costs due to increased prices	$	(42	)	$	(26	)
Increased deferred fuel and purchased power costs		38			23
Regulatory disallowance (see “Deferred Fuel and Purchased Power Costs” above)		(14	)		(8	)
Effects of weather on retail sales		6			4
Higher retail sales primarily due to customer growth and usage patterns, excluding weather effects		20			12
Miscellaneous items, net		8			5

Net increase in regulated electricity segment gross margin		16			10
Lower real estate segment contribution primarily due to decreased sales of residential property and land parcels		(36	)		(22	)
Higher depreciation and amortization primarily due to increased plant asset balances		(6	)		(4	)
Lower other income, net of expense, primarily due to miscellaneous asset sales in the prior-year period and decreased interest income		(6	)		(4	)
Higher interest expense, net of capitalized financing costs, primarily due to higher debt balances and rates		(7	)		(4	)
Income tax credits related to prior years resolved in 2006		—			(10	)
Other miscellaneous items, net		2			5

Net decrease in net income	$	(37	)	$	(29	)

Regulated Electricity Segment Revenues

Regulated electricity segment revenues were $68 million higher for the six months ended June 30, 2007 compared with the prior-year period primarily as a result of:

	•		a $48 million increase in retail revenues related to recovery of PSA deferrals, which had no earnings effect because of amortization of the same amount recorded as fuel and purchased power expense (see “Deferred Fuel and Purchased Power Costs” above);

	•		a $26 million increase in retail revenues primarily related to customer growth and usage patterns, excluding weather effects;

	•		a $9 million increase in retail revenues due to weather;

	•		a $17 million decrease in Off-System Sales due to lower prices; and

	•		a $2 million increase due to miscellaneous factors.

Real Estate Segment Revenues

Real estate segment revenues were $95 million lower for the six months ended June 30, 2007 compared with the prior-year period primarily as a result of:

	•		a $76 million decrease in residential property sales due to a slowdown in the western United States residential real estate markets; and

	•		a $19 million decrease in revenue primarily due to the timing of land parcel sales.

Other Revenues

Marketing and trading revenues were $10 million lower for the six months ended June 30, 2007 compared with the prior-year period primarily as a result of:

	•		a $12 million decrease from lower competitive retail sales volumes in California; and

	•		a $2 million increase due to miscellaneous factors.

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


	THREE MONTHS ENDED
	JUNE 30,						Increase (Decrease)
	2007			2006			Amount			Percent
Operating Revenues
Regulated electricity segment	$	711,293		$	712,718		$	(1,425	)		0.2	%	W
Real estate segment		48,352			112,603			(64,251	)		57.1	%	W
Marketing and trading		92,637			89,925			2,712			3.0	%	B
Other revenues		11,153			9,782			1,371			14.0	%	B

Total		863,435			925,028			(61,593	)		6.7	%	W


Operating Expenses
Regulated electricity segment fuel and purchased power		270,337			263,944			6,393			2.4	%	W
Real estate segment operations		46,174			98,412			(52,238	)		53.1	%	B
Marketing and trading fuel and purchased power		74,533			72,716			1,817			2.5	%	W
Operations and maintenance		177,310			168,332			8,978			5.3	%	W
Depreciation and amortization		92,835			89,297			3,538			4.0	%	W
Taxes other than income taxes		34,757			32,700			2,057			6.3	%	W
Other expenses		8,803			8,430			373			4.4	%	W

Total		704,749			733,831			(29,082	)		4.0	%	B


Operating Income		158,686			191,197			(32,511	)		17.0	%	W


Other
Allowance for equity funds used during construction		5,195			3,633			1,562			43.0	%	B
Other income		5,869			12,022			(6,153	)		51.2	%	W
Other expense		(3,269	)		(5,815	)		2,546			43.8	%	B

Total		7,795			9,840			(2,045	)		20.8	%	W


Interest Expense
Interest charges		52,967			45,882			7,085			15.4	%	W
Capitalized interest		(5,213	)		(4,959	)		(254	)		5.1	%	B

Total		47,754			40,923			6,831			16.7	%	W


Income From Continuing Operations Before Income Taxes		118,727			160,114			(41,387	)		25.8	%	W

Income Taxes		40,231			49,271			(9,040	)		18.3	%	B


Income From Continuing Operations		78,496			110,843			(32,347	)		29.2	%	W

Income From Discontinued Operations Net of Income Taxes		498			1,311			(813	)		62.0	%	W


Net Income	$	78,994		$	112,154		$	(33,160	)		29.6	%	W


Weighted-Average Common Shares Outstanding — Basic		100,229			99,221			1,008			1.0	%

Weighted-Average Common Shares Outstanding — Diluted		100,779			99,640			1,139			1.1	%

Earnings Per Weighted-Average Common Share Outstanding
Income from continuing operations — basic	$	0.78		$	1.12		$	(0.34	)		30.4	%	W
Net income — basic	$	0.79		$	1.13		$	(0.34	)		30.1	%	W
Income from continuing operations — diluted	$	0.78		$	1.11		$	(0.33	)		29.7	%	W
Net income — diluted	$	0.78		$	1.13		$	(0.35	)		31.0	%	W

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)
	2007			2006			Amount			Percent
Operating Revenues
Regulated electricity segment	$	1,247,344		$	1,178,844		$	68,500			5.8	%	B
Real estate segment		125,602			220,457			(94,855	)		43.0	%	W
Marketing and trading		165,108			174,927			(9,819	)		5.6	%	W
Other revenues		20,516			21,006			(490	)		2.3	%	W

Total		1,558,570			1,595,234			(36,664	)		2.3	%	W


Operating Expenses
Regulated electricity segment fuel and purchased power		473,690			421,339			52,351			12.4	%	W
Real estate segment operations		107,617			169,742			(62,125	)		36.6	%	B
Marketing and trading fuel and purchased power		132,477			146,891			(14,414	)		9.8	%	B
Operations and maintenance		348,888			346,759			2,129			0.6	%	W
Depreciation and amortization		182,456			176,918			5,538			3.1	%	W
Taxes other than income taxes		69,476			68,273			1,203			1.8	%	W
Other expenses		17,291			16,952			339			2.0	%	W

Total		1,331,895			1,346,874			(14,979	)		1.1	%	B


Operating Income		226,675			248,360			(21,685	)		8.7	%	W


Other
Allowance for equity funds used during construction		9,639			7,434			2,205			29.7	%	B
Other income		8,642			17,489			(8,847	)		50.6	%	W
Other expense		(7,883	)		(10,356	)		2,473			23.9	%	B

Total		10,398			14,567			(4,169	)		28.6	%	W


Interest Expense
Interest charges		103,959			93,408			10,551			11.3	%	W
Capitalized interest		(10,020	)		(8,983	)		(1,037	)		11.5	%	B

Total		93,939			84,425			9,514			11.3	%	W


Income From Continuing Operations Before Income Taxes		143,134			178,502			(35,368	)		19.8	%	W

Income Taxes		48,840			56,064			(7,224	)		12.9	%	B


Income From Continuing Operations		94,294			122,438			(28,144	)		23.0	%	W

Income From Discontinued Operations Net of Income Taxes		1,230			2,171			(941	)		43.3	%	W


Net Income	$	95,524		$	124,609		$	(29,085	)		23.3	%	W


Weighted-Average Common Shares Outstanding — Basic		100,138			99,168			970			1.0	%

Weighted-Average Common Shares Outstanding — Diluted		100,718			99,562			1,156			1.2	%

Earnings Per Weighted-Average Common Share Outstanding
Income from continuing operations — basic	$	0.94		$	1.23		$	(0.29	)		23.6	%	W
Net income — basic	$	0.95		$	1.26		$	(0.31	)		24.6	%	W
Income from continuing operations — diluted	$	0.94		$	1.23		$	(0.29	)		23.6	%	W
Net income — diluted	$	0.95		$	1.25		$	(0.30	)		24.0	%	W

B — Better
W — Worse