EX-99.6 7 p14136exv99w6.htm EX-99.6 exv99w6
Exhibit 99.6
Last Updated
2/20/09
Pinnacle West Capital Corporation
Earnings Variance Explanations
For Three-Month and Twelve-Month Periods Ended December 31, 2008 and 2007
     The following discussion includes earnings variance explanations for Pinnacle West Capital Corporation (“Pinnacle West”) for the three months and twelve months ended December 31, 2008 and 2007. 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, 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 (loss) from continuing operations for our regulated electricity and real estate segments and reconciles those amounts to our consolidated net income (loss) (dollars in millions):
                                 
    Three Months Ended     Twelve Months Ended  
    December 31,     December 31,  
    2008     2007     2008     2007  
Regulated electricity segment
   $ (17 )   $ (3 )   $ 256     $ 274  
Real estate segment (a)
     (36 )     6       (49 )     14  
All other (b)
     4       1       7       11  
 
                        
Income (loss) from continuing operations
     (49 )     4       214       299  
Income (loss) from discontinued operations — net of tax:
                                
Real estate segment (c)
     2       2       23       9  
All other (b)
     8       (3 )     5       (1 )
 
                        
Net income (loss)
   $ (39 )   $ 3     $ 242     $ 307  
 
                        
 
(a)   SunCor’s net loss in 2008 included a $32 million after-tax real estate impairment charge.
 
(b)   Includes activities related to marketing and trading, APSES, Silverhawk and El Dorado. Income from discontinued operations for 2008 is primarily related to the resolution of certain tax issues associated with the sale of Silverhawk in 2005. The 2007 loss is primarily related to an APSES project. None of these segments is a reportable segment.
 
(c)   Primarily relates to sales of commercial properties.

 

 

Last Updated
2/20/09
PINNACLE WEST CONSOLIDATED — RESULTS OF OPERATIONS
Operating Results — Three-month period ended December 31, 2008 compared with three-month period ended December 31, 2007
     Our consolidated net loss for the three months ended December 31, 2008 was $39 million, compared with net income of $3 million for the comparable prior-year period. The major factors that increased (decreased) our net income for the three-month comparison are summarized in the following table (dollars in millions):
                 
    Increase (Decrease)  
    Pretax     After Tax  
Regulated electricity segment:
                
Transmission rate increases (including related retail rates)
   $ 9     $ 5  
Lower mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals
     (12 )     (7 )
Higher interest expense, net of capitalized financing costs, primarily due to higher rates on certain APS pollution control bonds and higher short-term debt balances
     (12 )     (7 )
Higher taxes other than income taxes primarily due to changes in property tax valuation assessments
     (7 )     (4 )
Miscellaneous items, net
     (6 )     (1 )
 
            
Decrease in regulated electricity segment net income
     (28 )     (14 )
Real estate impairment charge
     (53 )     (32 )
Lower real estate contribution primarily due to lower land parcel and home sales resulting from the weak real estate market
     (16 )     (10 )
Other miscellaneous items, net
     4       3  
 
            
Decrease in income from continuing operations
   $ (93 )     (53 )
 
              
Increase in other income from discontinued operations primarily related to the resolution in 2008 of certain tax issues associated with the sale of Silverhawk in 2005
             11  
 
              
Decrease in net income
           $ (42 )
 
              
Operating Results — Twelve-month period ended December 31, 2008 compared with twelve-month period ended December 31, 2007
     Our consolidated net income decreased approximately $65 million, to $242 million in 2008 from $307 million in 2007. The major factors that increased (decreased) our net income for the year-to-year comparison are summarized in the following table (dollars in millions):

 

 

Last Updated
2/20/09
                 
    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)
     31       19  
Lower mark-to-market valuations of fuel and purchased power contracts related to changes in market prices, net of related PSA deferrals
     (14 )     (9 )
Regulatory disallowance in 2007
     14       8  
Higher retail sales primarily due to customer growth, excluding weather effects, partially offset by lower average usage
     21       13  
Effects of weather on retail sales
     (43 )     (26 )
Operations and maintenance expense increases primarily due to:
                
Customer service and other costs, including distribution system reliability
     (30 )     (18 )
Generation costs, including more planned maintenance
     (18 )     (11 )
Employee severance costs
     (9 )     (5 )
Higher depreciation and amortization primarily due to increased utility plant in service
     (18 )     (11 )
Income tax benefits related to prior years resolved in 2008
     —       30  
Income tax benefits related to prior years resolved in 2007
     —       (13 )
Higher interest expense, net of capitalized financing costs, primarily due to higher rates on certain APS pollution control bonds and higher short-term debt balances
     (15 )     (9 )
Miscellaneous items, net
     1       5  
 
            
Decrease in regulated electricity segment net income
     (65 )     (18 )
Lower real estate segment income from continuing operations primarily due to:
                
Real estate impairment charge
     (53 )     (32 )
Lower land parcel sales resulting from the weak real estate market
     (40 )     (24 )
Lower sales of residential property resulting from the weak real estate market
     (4 )     (2 )
Higher other costs
     (7 )     (5 )
Lower marketing and trading contribution primarily due to lower sales volumes
     (16 )     (10 )
Other miscellaneous items, net
     14       6  
 
            
Decrease in income from continuing operations
   $ (171 )     (85 )
 
              
Increase in real estate segment income from discontinued operations primarily related to a 2008 commercial property sale
             14  
Increase in other income from discontinued operations primarily related to the resolution in 2008 of certain tax issues associated with the sale of Silverhawk in 2005
             6  
 
              
Decrease in net income
           $ (65 )
 
              

 

 

PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
                                         
    THREE MONTHS ENDED                
    DECEMBER 31,     Increase (Decrease)          
    2008     2007     Amount     Percent          
Operating Revenues
                                        
Regulated electricity segment
   $ 634,756     $ 627,096     $ 7,660       1.2 %     B  
Real estate segment
     27,480       40,924       (13,444 )     32.9 %     W  
Marketing and trading
     9,274       29,149       (19,875 )     68.2 %     W  
Other revenues
     14,905       11,905       3,000       25.2 %     B  
 
                                  
Total
     686,415       709,074       (22,659 )     3.2 %     W  
 
                                  
 
                                        
Operating Expenses
                                        
Regulated electricity segment fuel and purchased power
     267,198       259,991       7,207       2.8 %     W  
Real estate segment operations
     30,219       39,644       (9,425 )     23.8 %     B  
Real estate impairment charge
     53,250       —       53,250       100.0 %     W  
Marketing and trading fuel and purchased power
     1,443       19,589       (18,146 )     92.6 %     B  
Operations and maintenance
     209,797       205,579       4,218       2.1 %     W  
Depreciation and amortization
     98,434       95,536       2,898       3.0 %     W  
Taxes other than income taxes
     30,510       23,802       6,708       28.2 %     W  
Other expenses
     13,090       10,388       2,702       26.0 %     W  
 
                                  
Total
     703,941       654,529       49,412       7.5 %     W  
 
                                  
 
                                        
Operating Income
     (17,526 )     54,545       (72,071 )     132.1 %     W  
 
                                  
 
                                        
Other
                                        
Allowance for equity funds used during construction
     2,425       6,321       (3,896 )     61.6 %     W  
Other income
     2,028       12,718       (10,690 )     84.1 %     W  
Other expense
     (9,523 )     (12,183 )     2,660       21.8 %     B  
 
                                  
Total
     (5,070 )     6,856       (11,926 )     173.9 %     W  
 
                                  
 
                                        
Interest Expense
                                        
Interest charges
     58,710       53,417       5,293       9.9 %     W  
Capitalized interest
     (4,227 )     (7,608 )     3,381       44.4 %     W  
 
                                  
Total
     54,483       45,809       8,674       18.9 %     W  
 
                                  
 
                                        
Income (Loss) From Continuing Operations Before Income Taxes
     (77,079 )     15,592       (92,671 )     594.3 %     W  
 
                                        
Income Taxes
     (28,373 )     11,124       (39,497 )     355.1 %     B  
 
                                  
 
                                        
Income (Loss) From Continuing Operations
     (48,706 )     4,468       (53,174 )     1190.1 %     W  
 
                                        
Income (Loss) From Discontinued Operations
                                        
Net of Income Taxes
     9,856       (1,557 )     11,413       733.0 %     B  
 
                                  
 
                                        
Net Income (Loss)
   $ (38,850 )   $ 2,911     $ (41,761 )     1434.6 %     W  
 
                                  
 
                                        
Weighted-Average Common Shares Outstanding — Basic
     100,836       100,420       416       0.4 %        
 
                                        
Weighted-Average Common Shares Outstanding — Diluted
     100,836       100,963       (127 )     0.1 %        
 
                                        
Earnings Per Weighted-Average Common Share Outstanding
                                        
Income (loss) from continuing operations — basic
   $ (0.48 )   $ 0.04     $ (0.52 )     1300.0 %     W  
Net income (loss) — basic
   $ (0.39 )   $ 0.03     $ (0.42 )     1400.0 %     W  
Income (loss) from continuing operations — diluted
   $ (0.48 )   $ 0.04     $ (0.52 )     1300.0 %     W  
Net income (loss) — diluted
   $ (0.39 )   $ 0.03     $ (0.42 )     1400.0 %     W  
 
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)          
    2008     2007     Amount     Percent          
Operating Revenues
                                        
Regulated electricity segment
   $ 3,127,383     $ 2,918,163     $ 209,220       7.2 %     B  
Real estate segment
     131,067       212,586       (81,519 )     38.3 %     W  
Marketing and trading
     66,897       138,247       (71,350 )     51.6 %     W  
Other revenues
     41,729       48,018       (6,289 )     13.1 %     W  
 
                                  
Total
     3,367,076       3,317,014       50,062       1.5 %     B  
 
                                  
 
                                        
Operating Expenses
                                        
Regulated electricity segment fuel and purchased power
     1,284,116       1,140,923       143,193       12.6 %     W  
Real estate segment operations
     149,125       192,972       (43,847 )     22.7 %     B  
Real estate impairment charge
     53,250       —       53,250       100.0 %     W  
Marketing and trading fuel and purchased power
     45,572       100,462       (54,890 )     54.6 %     B  
Operations and maintenance
     807,852       728,340       79,512       10.9 %     W  
Depreciation and amortization
     390,358       372,102       18,256       4.9 %     W  
Taxes other than income taxes
     125,336       128,210       (2,874 )     2.2 %     B  
Other expenses
     34,171       38,925       (4,754 )     12.2 %     B  
 
                                  
Total
     2,889,780       2,701,934       187,846       7.0 %     W  
 
                                  
 
                                        
Operating Income
     477,296       615,080       (137,784 )     22.4 %     W  
 
                                  
 
                                        
Other
                                        
Allowance for equity funds used during construction
     18,636       21,195       (2,559 )     12.1 %     W  
Other income
     12,078       24,694       (12,616 )     51.1 %     W  
Other expense
     (31,576 )     (25,857 )     (5,719 )     22.1 %     W  
 
                                  
Total
     (862 )     20,032       (20,894 )     104.3 %     W  
 
                                  
 
                                        
Interest Expense
                                        
Interest charges
     216,290       208,521       7,769       3.7 %     W  
Capitalized interest
     (18,820 )     (23,063 )     4,243       18.4 %     W  
 
                                  
Total
     197,470       185,458       12,012       6.5 %     W  
 
                                  
 
                                        
Income From Continuing Operations Before Income Taxes
     278,964       449,654       (170,690 )     38.0 %     W  
 
                                        
Income Taxes
     65,407       150,910       (85,503 )     56.7 %     B  
 
                                  
 
                                        
Income From Continuing Operations
     213,557       298,744       (85,187 )     28.5 %     W  
 
                                        
Income From Discontinued Operations
                                        
Net of Income Taxes
     28,568       8,399       20,169       240.1 %     B  
 
                                  
 
                                        
Net Income
   $ 242,125     $ 307,143     $ (65,018 )     21.2 %     W  
 
                                  
 
                                        
Weighted-Average Common Shares Outstanding — Basic
     100,691       100,256       435       0.4 %        
 
                                        
Weighted-Average Common Shares Outstanding — Diluted
     100,965       100,835       130       0.1 %        
 
                                        
Earnings Per Weighted-Average Common Share Outstanding
                                        
Income from continuing operations — basic
   $ 2.12     $ 2.98     $ (0.86 )     28.9 %     W  
Net income — basic
   $ 2.40     $ 3.06     $ (0.66 )     21.6 %     W  
Income from continuing operations — diluted
   $ 2.12     $ 2.96     $ (0.84 )     28.4 %     W  
Net income — diluted
   $ 2.40     $ 3.05     $ (0.65 )     21.3 %     W  
 
B — Better
 
W — Worse