exv99w7

Exhibit 99.7

LAST UPDATED:
7/30/08

Pinnacle West Capital Corporation
Earnings Variance Explanations
for the Three-Month and Six-Month Periods Ended June 30, 2008 and 2007

This discussion explains the changes in our consolidated earnings for the three-month and six-month periods ended June 30, 2008 and 2007. Unaudited Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2008 and 2007 follow this discussion. We will file our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 on or before August 11, 2008. 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, 2007 and the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2008. 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 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 six months ended June 30, 2008 and 2007 (dollars in millions):


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008			2007		2008			2007
Regulated electricity segment	$	121		$	71	$	114		$	74
Real estate segment		(5	)		—		(6	)		10
All other (a)		(2	)		8		1			12

Income from continuing operations		114			79		109			96
Income from discontinued operations, real estate segment – net of tax (b)		20			—		20			—

Net income	$	134		$	79	$	129		$	96


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

(b)		Primarily relates to a commercial property sale.

PINNACLE WEST CONSOLIDATED – RESULTS OF OPERATIONS

Operating Results – Three-month period ended June 30, 2008 compared with three-month period ended June 30, 2007

Our consolidated net income for the three months ended June 30, 2008 was $134 million compared with net income of $79 million for the comparable prior-year period. Net income increased $55 million in the period-to-period comparison and is reflected in the segments as follows:

	•		Regulated Electricity Segment – Net income increased approximately $50 million due to various factors, including income tax benefits of $30 million related to prior years resolved in 2008; the impacts of retail and transmission rate increases; increased mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals; a regulatory disallowance in 2007; increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts; and higher retail sales primarily due to customer growth. These positive factors were partially offset by the effects of milder weather on retail sales; higher operations and maintenance expense primarily related to distribution system reliability, generation costs (including planned maintenance and overhauls), and other costs; and higher depreciation and amortization primarily due to higher plant balances.

	•		Real Estate Segment – Net income increased approximately $15 million primarily due to a commercial property sale in 2008, partially offset by lower land parcel sales resulting from the weak real estate market.

	•		Other – Net income decreased approximately $10 million primarily due to lower marketing and trading contributions as a result of lower sales volumes.

Additional details on the major factors that increased (decreased) net income for the three-month period ended June 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 increase effective March 1, 2008:
Retail revenue increase primarily related to higher Base Fuel Rate	$	93		$	57
Decreased deferred fuel and purchased power costs related to higher Base Fuel Rate		(76	)		(46	)
Transmission rate increase (including a retail rate component)		7			4
Higher mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals		17			10
Regulatory disallowance in 2007		14			8
Increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts		7			4
Higher retail sales primarily due to customer growth, excluding weather effects		6			4
Effects of milder weather on retail sales		(18	)		(11	)
Higher operations and maintenance expense primarily related to distribution system reliability, increased generation costs (including planned maintenance and overhauls), and other costs		(12	)		(7	)
Higher depreciation and amortization primarily due to higher plant balances		(5	)		(3	)
Income tax benefits related to prior years resolved in 2008		—			30
Miscellaneous items, net		2			—

Increase in regulated electricity segment net income		35			50

Lower real estate segment income from continuing operations primarily due to lower land parcel sales resulting from the weak real estate market		(8	)		(5	)
Lower marketing and trading contribution primarily due to lower sales volumes		(13	)		(8	)
Other miscellaneous items, net		(2	)		(2	)

Increase in income from continuing operations	$	12			35

Increase in real estate segment income from discontinued operations primarily related to a commercial property sale					20

Increase in net income				$	55

Regulated Electricity Segment Revenues

Regulated electricity segment revenues were $118 million higher for the three months ended June 30, 2008 compared with the prior-year period primarily because of:

	•		a $93 million increase in retail revenues due to a rate increase effective July 1, 2007;

	•		a $20 million increase in revenues from Off-System Sales due to higher prices and volumes;

	•		a $13 million increase in revenues related to long-term traditional wholesale contracts;

	•		an $8 million increase in retail revenues primarily related to customer growth, excluding weather effects;

	•		a $7 million increase due to a transmission rate increase (including a retail rate component) effective March 1, 2008;

	•		a $24 million decrease in retail revenue due to the effects of milder weather;

	•		an $8 million decrease 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; and

	•		a $9 million net increase due to miscellaneous factors.

Real Estate Segment Revenues

Real estate segment revenues were $11 million lower for the three months ended June 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 $44 million lower for the three months ended June 30, 2008 compared with the prior-year period primarily due to the planned reduction of APSES’ retail commodity-related energy services and a decrease in other marketing and trading activities.

Operating Results – Six-month period ended June 30, 2008 compared with six-month period ended June 30, 2007

Our consolidated net income for the six months ended June 30, 2008 was $129 million compared with net income of $96 million for the comparable prior-year period. Net income increased $33 million in the period-to-period comparison and is reflected in the segments as follows:

•

Regulated Electricity Segment – Net income increased approximately $40 million due to various factors, including income tax benefits of $30 million related to prior years resolved in 2008; the impacts of retail and transmission rate increases; increased mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals; a regulatory disallowance in 2007; higher retail sales primarily due to customer growth; and increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts. These positive factors were partially offset by higher operations and maintenance expense primarily related to increased generation costs (including planned maintenance and overhauls), increased costs related to distribution system reliability, and other costs; the

effects of milder weather on retail sales; and higher depreciation and amortization primarily due to higher plant balances.

	•		Real Estate Segment – Net income increased approximately $4 million primarily due to a commercial property sale in 2008, partially offset by lower land parcel sales resulting from the weak real estate market.

	•		Other – Net income decreased approximately $11 million primarily due to lower marketing and trading contributions as a result of lower sales volumes.

Additional details on the major factors that increased (decreased) net income for the six-month period ended June 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 increase effective March 1, 2008:
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 increase (including a retail rate component)		10			6
Higher mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals		26			16
Regulatory disallowance in 2007		14			8
Higher retail sales primarily due to customer growth, excluding weather effects		12			7
Increased revenues, net of fuel and purchased power costs, related to long-term traditional wholesale contracts		11			7
Effects of milder weather on retail sales		(19	)		(12	)
Operations and maintenance expense increases primarily due to:
Increased customer service and other costs as a result of distribution system reliability		(18	)		(11	)
Increased generation costs, including more planned maintenance and overhauls		(15	)		(9	)
Higher depreciation and amortization primarily due to higher plant balances		(11	)		(7	)
Income tax benefits related to prior years resolved in 2008		—			30
Miscellaneous items, net		(3	)		(4	)

Increase in regulated electricity segment net income		22			40

Lower real estate segment income from continuing operations primarily due to lower land parcel sales resulting from the weak real estate market		(26	)		(16	)
Lower marketing and trading contribution primarily due to lower sales volumes		(21	)		(13	)
Other miscellaneous items, net		6			2

Increase (decrease) in income from continuing operations	$	(19	)		13

Increase in real estate segment income from discontinued operations primarily related to a commercial property sale					20

Increase in net income				$	33

Regulated Electricity Segment Revenues

Regulated electricity segment revenues were $205 million higher for the six months ended June 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 $37 million increase in revenues from Off-System Sales due to higher prices and volumes;

	•		a $20 million increase in revenues related to long-term traditional wholesale contracts;

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

	•		a $10 million increase due to a transmission rate increase (including a retail rate component) effective March 1, 2008;

	•		a $26 million decrease 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;

	•		a $25 million decrease in retail revenue due to the effects of milder weather; and

	•		a $17 million net increase due to miscellaneous factors.

Real Estate Segment Revenues

Real estate segment revenues were $40 million lower for the six months ended June 30, 2008 compared with the prior-year period primarily due to lower land parcel sales as a result of the weak real estate market.

All Other Revenues

All other revenues were $60 million lower for the six months ended June 30, 2008 compared with the prior-year period primarily due to the planned reduction of APSES’ retail commodity-related energy services and a decrease in other marketing and trading activities.

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


	THREE MONTHS ENDED
	JUNE 30,						Increase (Decrease)
	2008			2007			Amount			Percent
Operating Revenues
Regulated electricity segment	$	829,478		$	711,293		$	118,185			16.6	%	B
Real estate segment		36,880			47,819			(10,939	)		22.9	%	W
Marketing and trading		50,673			92,637			(41,964	)		45.3	%	W
Other revenues		9,162			11,153			(1,991	)		17.9	%	W

Total		926,193			862,902			63,291			7.3	%	B


Operating Expenses
Regulated electricity segment fuel and purchased power		327,561			270,337			57,224			21.2	%	W
Real estate segment operations		41,746			45,917			(4,171	)		9.1	%	B
Marketing and trading fuel and purchased power		45,245			74,533			(29,288	)		39.3	%	B
Operations and maintenance		194,909			177,310			17,599			9.9	%	W
Depreciation and amortization		97,784			92,476			5,308			5.7	%	W
Taxes other than income taxes		33,251			34,757			(1,506	)		4.3	%	B
Other expenses		6,822			8,803			(1,981	)		22.5	%	B

Total		747,318			704,133			43,185			6.1	%	W


Operating Income		178,875			158,769			20,106			12.7	%	B


Other
Allowance for equity funds used during construction		5,414			5,195			219			4.2	%	B
Other income		3,928			5,869			(1,941	)		33.1	%	W
Other expense		(10,063	)		(3,269	)		(6,794	)		207.8	%	W

Total		(721	)		7,795			(8,516	)		109.2	%	W


Interest Expense
Interest charges		51,583			51,827			(244	)		0.5	%	B
Capitalized interest		(4,938	)		(5,213	)		275			5.3	%	W

Total		46,645			46,614			31			0.1	%	W


Income From Continuing Operations Before Income Taxes		131,509			119,950			11,559			9.6	%	B

Income Taxes		17,076			40,713			(23,637	)		58.1	%	B


Income From Continuing Operations		114,433			79,237			35,196			44.4	%	B

Income (Loss) From Discontinued Operations
Net of Income Taxes		19,429			(243	)		19,672			8095.5	%	B


Net Income	$	133,862		$	78,994		$	54,868			69.5	%	B


Weighted-Average Common Shares Outstanding — Basic		100,653			100,229			424			0.4	%

Weighted-Average Common Shares Outstanding — Diluted		100,917			100,779			138			0.1	%

Earnings Per Weighted-Average Common Share Outstanding
Income from continuing operations — basic	$	1.14		$	0.79		$	0.35			44.3	%	B
Net income — basic	$	1.33		$	0.79		$	0.54			68.4	%	B
Income from continuing operations — diluted	$	1.13		$	0.79		$	0.34			43.0	%	B
Net income — diluted	$	1.33		$	0.78		$	0.55			70.5	%	B


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)
	2008			2007			Amount			Percent
Operating Revenues
Regulated electricity segment	$	1,452,279		$	1,247,344		$	204,935			16.4	%	B
Real estate segment		84,622			124,951			(40,329	)		32.3	%	W
Marketing and trading		108,131			165,108			(56,977	)		34.5	%	W
Other revenues		17,899			20,516			(2,617	)		12.8	%	W

Total		1,662,931			1,557,919			105,012			6.7	%	B


Operating Expenses
Regulated electricity segment fuel and purchased power		596,939			473,690			123,249			26.0	%	W
Real estate segment operations		89,965			107,253			(17,288	)		16.1	%	B
Marketing and trading fuel and purchased power		96,767			132,477			(35,710	)		27.0	%	B
Operations and maintenance		389,033			348,888			40,145			11.5	%	W
Depreciation and amortization		193,391			181,854			11,537			6.3	%	W
Taxes other than income taxes		66,403			69,476			(3,073	)		4.4	%	B
Other expenses		12,760			17,291			(4,531	)		26.2	%	B

Total		1,445,258			1,330,929			114,329			8.6	%	W


Operating Income		217,673			226,990			(9,317	)		4.1	%	W


Other
Allowance for equity funds used during construction		11,538			9,639			1,899			19.7	%	B
Other income		7,776			8,642			(866	)		10.0	%	W
Other expense		(14,971	)		(7,883	)		(7,088	)		89.9	%	W

Total		4,343			10,398			(6,055	)		58.2	%	W


Interest Expense
Interest charges		106,349			101,953			4,396			4.3	%	W
Capitalized interest		(10,617	)		(10,020	)		(597	)		6.0	%	B

Total		95,732			91,933			3,799			4.1	%	W


Income From Continuing Operations Before Income Taxes		126,284			145,455			(19,171	)		13.2	%	W

Income Taxes		16,519			49,754			(33,235	)		66.8	%	B


Income From Continuing Operations		109,765			95,701			14,064			14.7	%	B

Income (Loss) From Discontinued Operations
Net of Income Taxes		19,624			(177	)		19,801			11187.0	%	B


Net Income	$	129,389		$	95,524		$	33,865			35.5	%	B


Weighted-Average Common Shares Outstanding — Basic		100,587			100,138			449			0.4	%

Weighted-Average Common Shares Outstanding — Diluted		100,856			100,718			138			0.1	%

Earnings Per Weighted-Average Common Share Outstanding
Income from continuing operations — basic	$	1.09		$	0.96		$	0.13			13.5	%	B
Net income — basic	$	1.29		$	0.95		$	0.34			35.8	%	B
Income from continuing operations — diluted	$	1.09		$	0.95		$	0.14			14.7	%	B
Net income — diluted	$	1.28		$	0.95		$	0.33			34.7	%	B


B — Better

W — Worse