Pinnacle West Capital Corp (PNW) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the Pinnacle West Capital Corporation earnings conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards you will be invited to participate in the question and answer session. At that time, if you have a question, please press the one followed by the four, on your telephone.

As a reminder this conference is being recorded, Tuesday, July 23rd, 2002.

I would now like to turn the conference over to , Director of Investor Relations for Pinnacle West Capital Corporation.

Please go ahead ma'am.

Thank you , and thank you everyone for participating in our call or our web cast to review our second quarter results with us.

This call is being web cast simultaneously on our web site at www.pinnaclewest.com and a replay will be available on our web site through August 23rd. A replay of the conference call will also be available through August 6th, by calling 800-633-8284 and the reservation code, 2072-8853.

This morning I have with me Bill Post, our Chairman and CEO; Jack Davis, who is our President, and also President of Energy Delivery and Sales for Arizona Public Service; and Mike Palmeri, our Vice President of Finance.

Here is an outline of the topics for our call; Bill is going to give you a brief overview of our second quarter results and some of our operational drivers and outlooks. Then Mike will review the primary earnings variances for the quarter and provide a brief financial update. After which Jack and Bill will update you on the status of the western markets and other recent developments, including our regulatory efforts and generation expansion program. Finally, Bill will wrap up, and we'll open up the call for questions and answers.

Before I turn the call over to our speakers, I need to cover a few details with you.

The investor information section of our web site contains supplemental information on earnings variances, and operating statistics relating to the years 1999 through 2001, and through the second quarter of 2002. The information was also filed with the SEC as in 8-K this morning.

To help you quickly navigate the extensive information on the web site, to understand our quarterly results, here are a few tips. Comparisons of the operating statistics for the quarterly year to date and 12 month periods ended June 30th, 2002 and 2001, are contained in a , and in a summary tab in the .

Detailed explanations of our earnings variances with reconciliations to last year's period are also included on the web site. There's a lot of information on the web site to help you later with analysis and we believe you'll find this information to be very helpful in understanding our results.

Next it's my responsibility to advise you that this call will contain forward looking statements based on current expectations and the company assumes no obligations to update these statements. Because actual results may differ materially from expectations we you not to place reliance on these statements.

Please refer to the in our 2001 annual report on form 10-K, and our March 2002, form 10-Q, which identifies some important factors which could cause actual results to differ materially from those contained in our forward looking statements today.

Finally, this call and web cast are the property of Pinnacle West Capital Corporation, and copying, transcription, redistribution, retransmission, or rebroadcast of any or all of this call without Pinnacle Wests prior written consent is prohibited.

Now that I've got those details out of the way, I'll turn the call over to Bill Post.

I would also like to thank you for taking your time for joining us today our earnings for the second quarter were 89 cents a share compared with 79 cents a share a year ago. That represents a 13 percent increase and this is the result of strong performance in all of our operations as well as continued strong customer and sales growth.

However, simple of this growth would not appropriately capture the dynamics that we face in the future. Since the third quarter of last year we've explained that two major and principally offsetting items would dominate our performance this year reduced reliability expenses and lower power marketing earnings we've also said it would be difficult for us to repeat last year's earnings performance.

Results this quarter show both of these statements to be true however events of the last few months suggest performance in the last half of the year may be even more challenging than the first half.

Our replacement power and other fuel and purchase power costs are down about 104 million dollars before income taxes - or about 73 cents a share for the second quarter compared with a year ago - primarily due to lower market prices and about a 23 percent decrease in outage time at our nuclear and plants.

About two thirds of this decrease relates to abnormal expenses we occurred in 2001 for reliability for our retail customers in Arizona. Our generation group continues to perform at very high levels through discipline operations.

As expected the results for our power marketing and trading activities were down these activities contributed 19 million dollars of pretax gross margin or about 13 cents a share before operating expenses, during the second quarter. These results are down compared with the 98 million dollars or 69 cents per share a year ago because of the state of the western wholesale power markets.

I want to put in perspective the impact power marketing has to add and will continue to have on our earnings. In January of this year I described to you that we expected the contribution from our power marketing and trading activities to fall 50 percent from the record levels of 2001.

However as we considered principally that contraction of the power market due to the exiting of players in the last few months - it will be very difficult to maintain this ratio. Giving consideration to some potential improvement over last years fourth quarter performance our best estimate today would be that our contribution for marketing and trading will be about 75 percent lower than last years.

Let me provide a little background to support what I said. First we expected the margins on our off systems generation sales to be substantially lower because of lower market prices and our experience so far this year is in line with our previous expectations.

The gross margin on our trading activities however excluding the off system generation sales are down more than we had expected. Although on the surface our trading margin in the first half of this year was close to the targeted 50 percent reduction and it's actually down about 57 percent we expected higher levels in the first half and we're actually down 74 percent in the second quarter alone.

Finally, our pre tax mark to market gains related to future period deliveries we 129 million dollars in the third quarter of 2001. Our mark to market gains for the first half of this year related to future period deliveries totaled 17 million dollars before taxes - therefore repeating last years third quarter record performance is not likely.

This data and other details - historical data on our trading and off system sales are provided on our web site.

Mike Palmeri will now give you the financial detail and the ups and downs of the quarter and year to date. As well as an update on some of our financial issues.

Then Jack Davis will update you on our assessments of the Western power markets, as well as our regulatory efforts, and other developments. Mike?

Thank Bill. I would like to focus my prepared comments on the key earnings variances for the second quarter. I'd be happy questions regarding the quarter, six-month and 12 month ended periods during the Q and A session as well. I'd also like to clarify up-front that any time I refer to per-share effects, those amounts represent deluded earnings per share after taxes.

For the quarter as Bill has stated, the total of consolidate net income for the second quarter of 2002 was 75.4 million or 89 cents a share. This compares favorably with 66.9 million or 79 cents a share for the second quarter of last year. The major factors impacting the variances in the quarterly growth margin comparison can be broken into two categories. The electric retail business segment and the power marketing and trading business segment, including APS Energy Services, our competitive retail unit.

The retail segment is a good for the bundle of utility results during the regulatory transition to competition as it represents the wires business and the generation units dedicated to serving our retail customers. Our revenue net of purchase power and fuel costs, or pre-tax growth margin 411 million in the second quarter, compared with 403 million in last year's second quarter. The major factors that produce the increase of eight million pre-tax or six cents per share, consisted of an increase of 88 million pre-tax, 63 cents a share, from our retail business segment.

One of the major factors contributing to the increase in the retail segment margin was lower. Replacement power costs of 58 million, or 41 cents a share, due to lower power costs for plant outages and fewer unplanned outages. The other factors were lower purchase power and fuel costs, net of hedge, management revenues of 46 million or 32 cents a share and higher retail growth excluding weather effects of 12 million or eight cents a share. The retail margins were negatively impacted by milder weather of 16 million or 11 cents a share and retail price reductions of seven million, which is five cents a share.

The favorable margins from the retail segment were substantially offset by the weaker gross margins in the power marketing and trading segment. The power marketing and trading segment was down 79 million or 56 cents per share, compared to the prior period. Let me explain the decrease in contributions from our power marketing and trading business segment in a little more detail.

As you can see on page four of the summary section of the quarterly statistics, the power marketing and trading business contributed about 19 million of pre-tax growth margin, or 19 cents a share of this quarter, compared with 98 million, or 69 cents a share a year ago. The decline in sales of generation, other than was 26 million, or 18 cents a share. The primary reason, as Bill outlined, was the reduction, was lower market prices in the Western wholesale market. Our generation sales other than volumes, totaled 74 gigawatt hours this quarter, compared to 436 gigawatt hours in the prior quarter, an 83 percent decline.

The predominant driver was related to compress sparks read in the market. Our real live margin on training electricity and other commodities was 25-million pre tax. This represented a $6 million decrease or four cents a share. Of the 25 million, about 9 million pre tax related to realization of prior period market to market gains as contracted volumes were delivered.

For the quarter, our real live margins held up particularly well. We did record a market to market gains on contracts for future delivery of 3 million pre tax, two cents a share in the second quarter of 2002 compared with 36 million, or 25 cents a share in the second quarter of 2001. This decline represents a 33 million or 23 cents a share reduction in our earnings largely driven by reduced profit opportunities due to lower price and reduced counter party liquidity.

Before I continue discussing drivers, I would like to point out that customer growth in the second quarter was 3.2 percent. The customer growth has slowed compared to our long run growth rates, however, 3.2 percent is still about three times the national average. Going forward we expect customer growth to continue at about 3.2 percent for the balance of 2002 and to increase to 3.5, 4 percent thereafter.

For the quarter, our earnings also benefited from the following items; recorded higher gross margins of about 13 million or nine cents a share due to increase asset sale. Operations and maintenance expenses were lower by 3 million pre tax or two cents a share. Reduced O & M costs were primarily related to the 2001 reliability program of about 10 million pre tax or seven cents a share.

The reversal of the California related credit reserve of 4 million pre tax or three cents a share, partially offset by increased overhauls at our four corners plant and higher miscellaneous expenses. Depreciation and amortization was lower by about four million pre tax or three cents a share, primarily because of lower regulatory amortization as prescribed by our 1999 regulatory settlement agreement.

As a note for the year 2002, our regulatory asset amortization will be 30-million pre tax lower than in 2001 and this amount will eventually be spread relatively evenly over the year. Net other income decreased approximately 11 million, eight cents a share, primarily due to the absence of an insurance recovery of environmental remedation costs which was recorded in the second quarter of 2001.

El Darado also recorder losses in the current quarter, the current period, five million or four cents a share. As many of you remember, we transferred our power marketing and trading business from APS to the parent during the calendar year of 2001. The organizational transfer complicates the comparative analysis of our subsidiary results for 2002 verses 2001.

From the first half of '01 APS incurred the line share of power marketing and trading results. The majority of the power marketing and trading activity moved to the parent during the second half of '01. Other results, APS was down by six million or seven cents a share for the second quarter, due in large part to the power marketing and training decrease, partially offset by the completion of the reliability program. At the same time the parent company was down two million or two cent per share due to the decline in the power market and trading result as well as the shift of the power marketing and trading operations to the parent.

To help with this comparison we have expanded the quarterly web site information to include the gross margin for power marketing and trading by subsidiaries for the '99 through June 2002 period by quarter. For further information and analysis details of our earnings and the vary interest for the three six and twelve month period ended June 30, 2002 and 2001 are available on our web site along with the other information mentioned.

Finally I did want to touch on discussions we had with the rating agencies, we've met with all three agencies as recently as the end of April, to discuss all significant factors, imprudent to our business and to provide updated financial forecasts.

The forecasts provided were based on pending regulatory filing for a long-term purchase power agreement and the variants from the 50 percent procurement requirement.

We do not currently anticipate any rating outlook changes however the rating agencies collectively are monitoring our regulatory proceedings for any significant changes in the written profile of the company.

I have one additional topic that I'd like to cover with you today, the generation expansion capital expenditures have been funded with the accommodation of and internal sources of cash, the parent has been the interim funding vehicle for the generation expansion program varying the separation of asset regulatory plan.

We envisioned a permanent layer of debt capital at the parents of about 300 to 400 million to fund this operating activity including power marketing and trading. To date the parent has issued interim debt of about 450 million related to the generation expansion capital expenditures.

Our base plan is to re finance the inner more bridge debt at Pinnacle West Energy in the capital markets after the existing generating assets are transferred. As an alternative and consistent with the letter filed by Pinnacle West on July 11 its certain newly constructed Pinnacle West energy generating assets are transferred back to APS then APS will accordingly refinance the parent companies bridge debt in the capital markets.

I will now turn the call over to Jack Davis.

Thank you Mike. I want to add some additional information to what Bill said earlier regarding Western Electricity markets and our regulatory situation.

The market is currently in liquid and volumes are practically non existent . Market prices are low and there is very little volatility. Mean factors have contributed to the decrease in liquidity in the Western market including perceived uncertainty around the sanctity of a contract such as what exists in California and Nevada. Reductions in the use of on line trading systems, wider bit spreads and reluctance of parties to deal with options and reductions in the number of counter parties.

The number of counter parties participating in the market decreased dramatically through bankruptcies, credit down grades or decisions to exit the market or reduce market participation. This is not a sum gain as such reductions in the number of parties participating in the market results in reductions in the transaction volume.

Of 2001 top ten market participants, based on volume we are no longer trading with many of them and for the other parties that we are still trading with it is only limited basis.

The volumes of our delivered electricity from marketing and trading activities increased in the second quarter this year to 4.4 billion kilowatt hours from 3.2 billion kilowatt hours.

This does not reflect an increase in new wholesale trading activities, rather it reflects increased deliveries rated to transactions negotiated in prior periods.

A great deal of public attention has been focused on risks related to marketing and trading activities and on the complexities on mark to market accounting.

Our unrealized market, marketing and trading gains totaled approximately $133 million as on June 30 of this year.

More than 95 percent of these gains have been hedged which we expect to substantially mitigate potential earns volatility from future market power changes.

Also the counter parties with whom we do business are essentially all investment, approximately 95 percent.

We do have a measure of concentration of our credit risk in one party account and one party accounts for about 45 percent of our mark to market assets as of the end of June.

This counter party is investment grade and is not merely a power marketer.

To continuously monitor and evaluate the credit worthiness our counter parties and if necessary make adjustments to interactivities with them.

Some of you have asked if we intend to close or scale back our marketing and trading operations. This group is not large and we did not scale up in the first place, first and foremost that group has been charged with risk management for enterprise wide power and generating fuels needs and with selling generation output not needed for our native load into the wholesale market.

Those risk management activities will not change, with the knowledge base and skills necessary to navigate the wholesale markets for risk management purposes we will continue to take advantage of trading opportunities as they bid into our risk controls.

Let me now turn to a couple of issues within the FDRC arena.

First I will discuss the recent action taken by the FDRC to increase the electricity price cap.

Last week the price cap was changed to $250 a megawatt hour, beginning October 1st this year.

This represents almost a tripling of the existing cap, so far though the forward curve for electricity here in the West has not seen much movement as a result of the cap increase.

This is not surprising at this point in time due to other uncertainties that overhang the electricity market.

Main parties may be working off hedges taken earlier, and there may be a significant reduction in the amount of un-hedged positions compared to previous positions.

The second issue concerns natural gas transportation.

We have been disclosing a potential change in our long-term fuel requirement contract with natural gas for transportation of our natural gas as well as similar contracts for other shippers east of California.

I would like to update you on the status of this situation.

California shippers argued to get rights for full requirement shippers east of California should be restricted, so more gas can pass through the natural gas pipeline to California.

In May approved a recommendation by staff for a specific limitation of the allocation of capacity for full requirements east of California shippers. gave the full requirement shippers until August 1st to decide amongst ourselves how to split up the allocation or would decide the issue.

provides that the new allocations would go into effect on November 1st.

The east of California shippers have filed motions with to reconsider the decision, after the motions were filed the FDRC established September 23rd as the date, as its deadline for considering the issues raised in the request for re-hearing.

We intend to continuously, we intend to continue to vigorously defend our position as a company and pursue any necessary remedies to pursue the sanity of our contract.

Meanwhile we and other east of California shippers have been meeting in an attempt to agree on an allocation of the reduced capacity allocation.

If the negotiating process or a FORB decision does not result in our allocations comparable to the amount we have on our existing contract there are other potential of ways for us to get the gas transportation capacity we need. However the cost may increase modestly.

Now let's turn to state regulation. Achieving acceptable market structure for the regulatory process continues to be our primary regulatory objective. Under the existing competition rules and our 1999 settlement were required to transfer our generation assets to an by the end of this year and to begin competitively building at least half of the apartments in 2003. The condition has a docket on electric restriction under way and we are expecting a option recommendation on that document in the near future possibly as early as the next few days. There has been indications from the commission that is considering temporarily suspending there per asset transfers and building to give self more time to consider the appropriateness of the market structure and having for transition to competition within Arizona.

All those restriction of rules is not our first choice a reasonable path to competition within the settlement time frame will not in clear our financial liability or our goal to serve customers. We remain convienenced that reliability of cost, visibility our major that we remain convinced that reliability and cost visibility are major issues with our customers as long as with regulators and other public officials. As such we are provided options to the commissions that we will equally maintain our commitment to our customers while earning reasonable returns for our shareholders.

Last October we filed a request with the ACC for approval of while they continued biding requirements and the purchase part between APS and our marketing and training in there, that will residually provide energy for all our retail customers at stable prices while completing a generation asset transfer and beginning a transition to competitions with in Arizona.

In April this year we asked the commission to internal the pack the competition or an alternative to establish a mains to restore our structure to the one that existed before the 1999 settlement.

On July 11th, we present the commission with tray that will allow it to delay the of competition. Again while maintaining our financial integrity. We stated that we would support a delay of APS could acquire assets built or been built by Pinnacle West industry to serve APS customers.

The commission would issue any necessary additional financing authorizations for APS to complete the acquisition and the commission would recognize that the assets would be subject to low rate making proceedings as long as they remain at APS serving retail customers.

Did our firm believe that the commission needs to, decide properly and fairly on the Pinnacle policy choice wither to continue towards retail competition or reverse course and return to traditional cost regulation and we currently expect the commission to make this decision in the near future.

The time ness of this decision is essential so that affective parties can take appropriate steps to implement the commission decision. Whatever it may be. Now I'll turn the call back over to Bill.

As Jack describes it the regulatory part in Arizona achieving an acceptable market structure through the regulatory process continues to one of our key objectives. We provide the commission with a number of alternatives that we believe meet the needs of the customers and share holders a like between now and 2004 we expect continued regulatory review on rate levels compared to the bidding transmission reliability and many other areas. In any case we believe our settlement will remain in price for giving price certainty to our customers, financial stability to our shareholders in the viewing of 2004. Excuse me, as you know we did not provide a specific per share earnings guidance instead we try to provide you sufficient detail and information so that you and determine for yourself, the components of our earnings and make your own decisions concerning the impact of future events.

In total, our performance for the year excluding power marketing has been very strong. Our year to date, nuclear capacity factor is 95 percent, and in total was 84 percent. And we believe, continuing improvement is achievable in all areas of our operations.

Our market continues to grow, we've seen an increase in retail sales, due to customer growth as well as consumption per customer.

Last year's conservation efforts have been reversed significantly, and with the addition of our plant at West Phoenix, Redhawk, and Solero, we're confident we will be able to meet this year and next years load growth.

These plants are part of the reliability component of our regulatory plants, which the commission is currently considering an

Regarding the remainder of our expansion plan, the Silver Hawk units and the Southern Nevada and Redhawk units, three and four, we will continue our evaluation of the projects really below growth, market prices, partnership opportunities and other alternatives. We may or may not, rate ground on these projects in the future, once again, I will reiterate that our generation program will be sized to meet remain over growth, cash flow and market conditions.

Our strategy has not changed since it was announced in 1999. Maintaining an intense focus on cost management and efficiency, has been and continues to be a corner stone of our company.

This morning, we announced cost containment and efficiency measures that include a voluntary work force reduction of 500 to 600 positions. We will begin implementing these measures in the second half of this year, and expect them to produce annual savings and pre tax operating expense, of $30 to $35 million beginning in 2003.

We also expect to record a one time charge for the work force reduction program later this year, which we estimate will be approximately amount of one years savings.

Our operations at Sun Corn, and EPS Energy Services continue to improve. They improve their contributions in the first half of this year, with combined earnings of $23.6 million or 28 cents a share, compared with a combined loss of $7.3 million, and 9 cents a share in the last half of last year.

We expect these two companies, to provide improved contribution for this year and into the future. By the way, it's important to remember, that EPS Energy Service, is reported in our marketing and trading segment and therefore has helped to soften the apparent decline in Marketing and Trading results, this year, when due from a segment prospective.

During the remainder of the period covered by our 1997 agreement, approximately the next two years, there are several factors that will positively affect our earnings outlook or provide earnings visibility.

Our supply position continues to improve as we add new generation, given greater stability to our customers and earnings opportunity to our shareholders.

A retail customer growth, continues at levels, at least three times the national average and we continue to have an intense focus on cost management and efficiency.

There's also continued uncertainty in several areas. As Jack described to you, Western Wholesale Power Markets, regulatory jurastiction issues, California energy issues, public powers, federal legislation and others. Taking all of these factors together, I believe it would be inappropriate to provide specific earnings per share growth targets for 2003, however, I believe a focus on our core business, operational excellence, leverage of our growth territory, and continued aggressive cost management while improving customer service levels, will allow for strong financial returns.

Along that line, I believe that the dividend is one of the strong investment characteristics of our company and this month we declared our latest quarterly dividend, as we have said in the past, we expect to continue to grow our common dividend annually by approximately the same dollar amount, which will maintain our dividend growth above five percent, well above the industry average.

That concludes our prepared remarks and we will be happy to answer any questions you have.

Thank you, ladies and gentlemen if you wish to register a question for today's question and answer session, you will need to press the one followed by the four on your telephone.

You will hear a three tone prompt to acknowledge your request, if your question has been answered and you wish to withdraw you polling request, you may do so by pressing the one followed by the three.

If you are on the speakerphone, please pick up your handset, before entering your request. One moment please, for the first question.

Our first question comes from Greg Gordon, with Goldman Sachs, please proceed with your question.

Thanks, hi Bill, hi everybody.

Hi Greg.

Ugly times in the market but the at least you guys are putting up evenly a good performance and I do want to thank you for, for what is best in class disclosure, it's really a nominal package you guys have put together for us.

Thank you Greg.

But the one, the two pieces of the picture that aren't in there, maybe you could comment on where, overall corporate debt capital is at the end of the second quarter and where you expected to be at year end? And also, whether we are seeing sub-sequential improvement in operating cash flow year over year as these mark to market gains from last year role into the cash flow statement of if something different is happening relevant to cash flow, if you could give us directionally, what's happening there?

Yeah, I don't know if we have finalized it the balance sheet, but it hasn't materially moved from the latest publicly released. We, we have been hovering in the, right around the 60 percent and we didn't envision that changing, really kind of peeking it at that level is our forecast.

On the cash front, it's been relatively stable, as you know we had a relatively strong and high capital expenditure budget for 2002, but we in essence, substantially complete the significant program really by the middle of next year, so we see a significant enhanced profile over the longer term and we hold the leverage ratio and bring them down accordingly over the next several years.

So it's still the plan to bring down leverage through internally generated funds rather then accessing the capital markets?

That's true.

Great. Second and last question, could you give us a little bit more information as to why the unregulated businesses are so robust, maybe give us an update on SunCor and also on the Energy Marketing business, what those businesses are subsequently significantly higher? Whether that's sustainable or not?

Sure, two things, first, last year as you know, in fact for the year for both of those organizations actually had losses for the year, so one of things that is producing that improvement is a poor performance last year.

If we look at this year performance, APS Energy Services, we have seen significant increases in terms of revenues, particularly in California, as we continue to serve principally some of the large customers there. That has been the focus of Energy Services, literally from the beginning, that they were one of the first companies in California, when Sacramento opened their markets and we continue to see opportunities in California.

As to SunCor, it is as you know, the timely of assets sales, which really impacts that, we do see continued improvements with SunCor as we go forward and an increase in the velocity in the sales of those assets.

Excellent, thank you very much.

Thanks Greg.

Our next question will come from from Credit Suisse First Boston. Please proceed with your question.

Good afternoon. Perhaps you could give us a little bit more specifics on some of the milestones coming up in the commissions procedure as it relates to the track B, track A track B issues, and maybe you know, just very quickly, I guess summarize. Is there anybody that is really arguing for the commission to go ahead with the current plan? What I mean is, not cost of service, or not the PPL that move ahead with the rules as currently drafted in the settlement agreement, is that, is anyone advocating that position?

Let me take a shot at it and then Jack can add in when I get finished. First, let me go back to your track A track B. We think there's a chance we may see this week a proposed ALJ order on track A, and then they will be responses to that. I believe 10 days after that proposed order is put forward and then a decision we believe shortly thereafter. As to track B, the track B issues are basically those issues dealing with bidding and process of bidding. We continue to request that the commission aggressively consider those issues, no matter which way the commission ends up going. We think that's important, and we do think the commission will continue to deal with those track B issues, and they maybe addressed in this ALJ order I mentioned, that we anticipate some time this week.

Has there been hearings held on those track B issues yet?

Not yet, no. As to is there anybody that is basically purely on the position, and only on the position just going forward with the rules, no, there really isn't anybody, just purely on map position. Our position continues to be that we should aggressively move forward, but as you know, and as Jack described to you, we have provided other alternatives to the commission.

This is Jack. The only thing I would add is there are no hearings planned for track B issues. It will be handled through a surge of workshops, the first of which will be the 24th and 25th of this week. With a long list of issues, a list longer than my arm, so it'll be a while for all those things to percolate through the system. And then ultimately, you have to end up with some sort of commission or based upon results of those workshops.

But the, now the timing that the commission has articulated thus far, was their intention to decide track A by the end of August, I guess concurrent with your notification to transfer 30 day notification that you're getting a sense now that that may become, I guess a couple of months earlier than expected?

Well no. What I said I think it's right on what we had expected. I think we had anticipated that we would have received the ALJ's order this week, and we think that's going to be on schedule.

OK. Fair enough. On the numbers, it looks like this quarter, you benefited about 68 million I think from year-over-year removal of some of those reliability expenditures, 58 on gross margin, 10 on O and M, from second quarter of last year, the 140 that you talked about in your 10-K, is that still a good number?

Yes, it is.

So it'll be around 70 million, next year?

Yes. It is, that is the number that we put together last year and we still think we can achieve that.

OK. And then, I guess sort of, last piece. Maybe you could give a little bit more color on the hedge position, third quarter this year, and I guess, on into next year?

I calculate, with the new generation that you're building and if you assume a, I guess, a couple of percent increase in load, you would need about 5 - 600 megawatts to get to a 12 percent reserve margin in hedging. And I guess, sort of next year, it's probably pretty similar.

Can you, I guess, talk about what, you know, are you already hedged for these periods? And do these changes in the power markets your witnessing at West, are the - do those impact, you know, how you're going about your hedging at all, for the retail supply?

Scott, I'll start with 2003. We already hedged about a 15 - 14 - 15 percent reserve margin in 2003, and you should also recall or remember that we're bringing on 550 new megawatts in 2003 at West Phoenix, which helps with that.

In 2004, we are about 75 percent hedged and that's an open position right now, in terms of the hedge piece, still trying to figure out the outcome of what our commissions want to do regarding competition.

OK.

And the only thing I would add to that is, I think, if you look at our load forecasts, to kind of underlie that, we already set a new peak this year, over last year, it's about 1.8 percent higher than last year. Although we're not through the summer, we don't think that will be our final peak by the end of the year. We're pretty much on target with those projections.

And then, I guess one last point.

, is far as the decision not to move forward or, I guess, the delay in that project, right now. I think historically in the numbers that you have put out, as far as capital needs and borrowing and such, I think those had included , is that understanding correct?

Yes that's correct. Yes.

OK. So the capital required for that project isn't necessarily going to be spent. Can you just talk about what, you know, if you decide not to go forward with that project, what the impact might be, I guess if and the other and, you know, when you need to make that decision?

Well, as I said that's something we're going to continually look at. We're anticipating going forward with , and as I mentioned earlier, as we look at the market conditions and changes, as you know, there's quite a bit going on in Nevada. There are things there in dealing with the commission and with the Nevada Power Company that deal with that market, that may have an impact on .

But our plan, and as we have filed in our 10-K, includes those construction expenditures. It also includes of the total of , about a 25 percent sale under our current agreement, and we may look at other partners to increase that. But our current plan is to go ahead, and those are the numbers that are included in the 10-K, and the construction expenditures are outlined there.

But from a timing standpoint, would, I guess earlier in the call, there looked like there might be some delay to , but for now we should assume it proceeds on ?

I wouldn't assume a delay.

OK. So, you'd have to be starting it pretty soon to meet the for?

That's right.

OK. Thank you.

Our next question will come from from please proceed with your question.

Thank you, I just have a quick question in terms of framing what guidance has been provided, should we think about last year's reported number that as a $3.85 number or should we be adding in the, I think there is a 15 cent one time gain, one time charge if memory serves that made it closer to $4 operating number, just if you could clarify that for me, that would be great.

Well, it is, literally you're right in terms of what was reported, that is the number for last year, as we talk to you in January the bulk of that adjustment that you mentioned was related to which would put us, if you were to take the adjustment back out for last year, put you back up at around the $4 range.

As we said in January our internal target was really at the $4 level, as we looked at the year and that has not changed, it is still our internal focus cause of that one time impact from , on the other side of the coin as we look at the financial year it really was $3.95, so I'll leave that up to you in terms of what one you want to look at.

OK, thank you very much for your help.

Our next question will come from with Michael Miller Management, please proceed with your question.

Thanks on the SunCor assets sales can you just give me a little more color on exactly what it is you're selling.

Basically properties that we have developed and have reached from our standpoint the appropriate parts or the appropriate point in their investment curves for sale and so it really depends on the conditions in the market and the assets in each of that market, it is something that we have done for years and as you look at the market here depending upon which category of asset you're looking at, whether that be commercial office buildings or development properties, each one of those is viewed differently but it is focused on maximizing the value of those assets for the shareholder.

And can you just give me an idea of what the balance of that category is for SunCor how much, how big is that?

How big is that?

How many hundreds of millions of dollars of property do you have that you have available for sale to book these types of gains

Well you've got a total value in SunCor in the range of $500 million

OK, great thank you and then on the, yesterday I noticed had a settlement with, on or some sort of arbitration ruling in their favor, did that impact you and will that have this quarter, will there be an impact on earnings?

It may have some impact on us, there was about a $20 million decision for for the plant, we own 15 percent of the plant, so if you look it over the next period it won't be as significant financial effect and in terms of the details of that decision, frankly I just got that this morning and I'm going to learn more about that today.

OK, last thing on the marketing and trading front, it looks like the markets telling us that are going to go bankrupt here any second, do you have any counterparty risk there and if so, I mean is it something that you're not worried about or can you tell or give a little color on that?

Yeah we have actually some but it's again it's not significant in the - with many of various exposures it's a very manageable exposure.

Less than five percent then?

It's very manageable.

OK - give me what's manageable though - give me an idea of - if these guys go bankrupt tomorrow - which it looks like maybe sometime in the next week it's gonna happen - is there an - do we have to worry about an impact?

Well, I don't view it with altar maturely the earnings potential of this company.

OK, great thanks a lot.

Our next question comes from with Bank of America Securities please proceed with your question.

Hi yes I've got a couple of referring to bridge financing it's have issued - if we could go back and if you could remind us what the liabilities are at Pinnacle Energy and what are the receivables of the parent and if you could comment on the interest rate at one each and actually tell us what the differential is between the interest rates. Thank you.

OK, first of all we do not have any specific external liabilities at Pinnacle West Energies so really all of the funding requirements have been conducted at the parent company on behalf of Pinnacle West Energy.

All of that bridge financing was designed to be taken out upon an asset transfer transferring to Pinnacle West Energy. We met some debt at the parent company a 300 million dollar fixed rate - I think it's got about four year maturity left - we've got 250 million floater that has another little over a year before it expires and then we did a two year 215 million dollar deal and the rest is essentially and it helped structure for flexibly to give us the ability to move debt to the proper operating company.

OK and I guess going back to the question of the debt to capital - I guess, as far as I see it the last time I saw it was about 58 - 59 percent and I guess my question goes into the point that if the regulators stay on the asset transfer and that then they're looking to move the assets to APS and have APS issue that amount of debt for the financing. Then what is the what is the debt right now at APS and would you sell equity in order to maintain certain ratings.

Well, we don't view the venture as causing us to require equity capital we've been flexible - we're prepared for either outcome. We also don't anticipate an outlook change at either Pinnacle West or APS as a result of the assets going in one direction or the other.

OK thank you.

Our next question will come from with please proceed with your question.

Hi it's actually Greg Lucas - thank you very much. I wanted to clarify a couple things . Is there a way - I didn't really understand the answer to a previous question regarding SunCor.

Is there a way that you could size it for us the number of acres that you have to sell - potential prices you're seeing?

I think the best way to look at that is to look at the historical contribution that SunCor has made. SunCor is then in the range of $25 million a year of cash coming to the parent. We see that being able to repeat itself as we go forward and in terms of the a breaking out the assets acre by acre, that's not going to give you any real foundation because its ah as we deal with office buildings, for example, you don't have any really homogenous measure to take a look at that, but what I would say is that we do see continued and growing contribution from SunCor as we go forward.

Let me ask it a different way, are you adding to the reservoir plant as much you're drawing down on it.

No.

Is it a depleting mass its kind like a depleting asset.

No and that's why its more complicated than looking at just land, because there are other assets there but in terms of raw land we are not increasing our holding in total raw land, and have not increased it in several years.

Well I think you have something like four cents last year and I think you were saying you would be on track for at least ten this year, can I extrapolate that for the next of couple of years at that type of rate.

Well as I mentioned to you before we have to take a look at the whole picture and if you take a look specifically at just SunCor

That's what I'm asking about yes

Right I would look at the history in terms of the cash flow piece in terms of the cash contribution.

OK.

I do expect to improve our position and of course as we look at changes in the market that particular business changes even faster than the utility business does.

OK

To the extent there is opportunities in the market that we can take advantage have to take value those assets that has been and continues to be our goal.

OK my second question is the follow on the question another earlier question and I also would second what said about your disclosure, it's very good. Just regarding marketing and trading I think it was a $2 contribution last year and previously you had got it to 50 percent lower and now your saying 75 percent lower and I'm just wondering it looks like going back to that $2 number that like maybe sensitive was trading yet a $1.10 was you know wholesale realization when your reducing the guidance to 75 percent do I equally take from trading. In wholesale whereas its skewed in a different type of product.

It is skewed in a different type of pattern and I think you can take it all out of trading.

I can take it all out of trading.

Yes sir

OK so that would that would leave me then with only something like 20 cents of trading or something like that.

I don't have that number off the top of my head but if you just look at the web site you can get to that, I think that makes sense in round numbers.

In terms of the contribution this year it would come down to like 20 for trading or something.

Something like that right

OK and the other the very last little question I had had to do with the regulatory proceedings, and if I understand just the answer to an earlier question regardless of whether it is divestiture or whether there's the rate basing of assets you would not see any need for equity capital at this time to raise additional equity, just to second that your answer just to make sure I understand it.

Well as Mike said as we look to the future based on the plans that we have and the issues that we're dealing with the commission, we don't see that in the plan right now.

OK and a tiny little last question is the capitalized interest is an estimate of about a dime on capitalized interest good for '02, in terms of the capitalizing the interest on the new plants

I don't have that number off the top of my head. If you call back we will be glad to give it to you.

OK, thanks again.

Our next question will come from with Merrill Lynch, please proceed with your question.

Yeah, Hi Bill how are you?

Hi Steve.

Two questions, first you noted the specific kind of new rough guidance view on the power marketing side, but if you look at the rest of your business and I guess mainly the utility business, would you say your view is similar to at the beginning of the year or is it slightly better, slightly worse?

I would say it's similar. Actually if you take out the weather piece that we experienced this year compared to last year I'd say it's probably a little better.

OK and my other question is, with respect to the letter you sent to the commission on this kind of alternative plan to move potentially, you know agree to a delay but move the assets from Pinnacle West energy to the utility. Have you gotten any response to that? I know there's one of the commissioners made some comments that seemed to be relatively constructive. Could you just give some view on the response you've gotten to that letter?

Well it is too early to say. There hasn't really been much provided formally on that. One of the commissioners sent a letter last week, basically commenting on the letter and the way from his standpoint that he saw the commission going forward. I think the issue of the order that's coming out this week, what we think will come out this week will bring forward that issue in a manner that will be formal and public.

But as of today, the only real public responses we've received has been letter.

OK, just so I understand the comment this week could potentially address the, something like this, some of the provisions in that letter or would it just address whether to move forward with a transfer or not?

Ah, Mike Steve but we don't know that.

OK

We just don't know exactly what that order will contain. The issues that we included in that letter have been discussed, some of them precisely on point in the hearing and it is possible that the hearing officer may take some or even all of that letter into account. It's also possible that that order may just deal specifically with those issues that were debated specifically in the hearing and keep its focus to that. Frankly, we don't know what that order is going to include.

OK, thank you.

Our next question comes from with . Please proceed with your question.

Actually it's . Good afternoon.

Hi .

Ah lets see, just to try to get a sense here as to am, when you talked about your hedge position for the and everything like that. Is there a way to kind of tell us at this point, I know that you, when you've had to put on hedges cause your naturally short during the summer? Your probably still had some hedges in place for the utility that are well above what they would be able to be replaced for in today's market, is that not correct?

Well the, this is Jack. The hedges we have in place for 2003 would be a combination of hedges that were dated back to the year '99 and 2000, and some of the hedges were put in place, probably the first part of this year.

Would you agree that if you were able to kind of you know, reprise the hedges, for lack of a better term, that there is a potential positive delta over time here, given the current state of the market?

Yeah, I would say that especially in light of the, you know, remember the cap is going to go to 250 on October 1st and that may have some impact, although the market so far has not reacted to it.

Is there, I mean, can you tell us, can you give us a sense as we move from 2002 to 2003 there's any above market hedges that will fall off in 2002, that get replaced in 2003 at a more advantageous rate that would provide a positive year-over-year delta.

I don't have that off the top of my head.

I'm just trying to get a sense that maybe, I mean if you were able to kind of carry this out to '03 and maybe a little further out, given the current market conditions and your ability right now to hedge out towards that time-frame, how much excess cost do you think is still currently reflected in you financials that you think in today's current marketplace will be eliminated over time?

I just don't have that number, and remember that volumes of the hedge in 2003 are substantially less than the volume of hedges in 2002, due to the fact that we have 550 megawatts of combined cycle coming out, so I'm not trying to avoid your answer, your question, but I just don't have that off the top, but remember the volumes decreased substantially. The volume of the hedge decreased substantially.

OK. Thank you very much.

Our next question will come from with JP Morgan. Please proceed.

Good afternoon everyone. Most of my questions have been asked and answered, but can you talk a little bit about the pension issues here, your in under, you are under deployment by about $80 million, what do you need to do to get that back to an even funding, and have you had any changes in the underlying expect of return given this bare market that we're in?

Well it's something that we look at every year, and we believe what with the contribution that we've made this year, the cash contribution that we're going to make this year, we do not see any extraordinary contribution next year.

Who set the expected return? Is that done through the company, approved by the boards with outside pension consultants or does the Arizona regulators have a hand in that?

Well it's the former.

OK thanks.

Our next question will come from Tom O'Neill with Lehman Brothers. Please proceed with your question.

o'neill: Good afternoon. I've three more or less unrelated questions. The first is on any detail you can provide on the structure, the bridge financing, I guess when you would be required to term out that financing, and how it relates to the timing at the ACC?

Well I guess I'll just comment the commitment that we made to the rating agents fees was essentially to term out that bridge that over a period between today and the end of 2004. We try to build in as much flexibility.

o'neill: OK, so you have between now and '04 to term out?

That's the commitment we made.

o'neill: OK, and that's the 450 million?

Essentially.

o'neill: OK. And the other piece that was related to the marketing and trading, same time frame?

We intend to keep a permanent layer of three to four hundred million.

OK.

And which is already outstanding and it's like a four to five year maturity.

OK. And then a question on the assets, I just, two different positions, first if the assets were to stay outside of the utility, are they any affiliate rules that would need to be put in place and then conversely, if the assets were to move in to the utility, when would you presume that the rate making on those assets would occur? Is it something near term or would it be rolled into say the 2004-distribution rate case?

Well let me answer that two ways, let me start with the last one first, in terms of the process of reviewing, that that would start near term but I don't see a decision on that until the end of the Summon agreement.

OK.

So, as I mentioned earlier, I think as we look out to the next really couple of years, throughout the settlement agreement period, I would expect that we would be dealing with regulatory issues before the commission that cover up broad, broad spectrum and in the 1999 settlement agreement, one of the things that we agreed to do was to file by June of next year, a full cost of service rate filing, which we intend to do.

Our expectation is that would take most of 2003 and we'd be in the 2004 before there was a decision on that.

OK. And, I guess in the , our would you invasion the pricing of the assets between the two foliates?

I need to understand your question a little better, when you say the pricing of the assets.

Right, the output from the generation facilities that have been dealt?

Well, it really comes from two places, to the extend that that energy for those reliability assets, that would really go into the service of native load, which is a fundamentally tear of about four and a half to 4.8 cents kill to have in generation.

Ok. And then, one last question is on APS Energy Services, I recognize you saying the strength was given a lot by California, just curious what change could occur or if there is any risk to those contracts as a result of the imposition of exit fees in California on direct access customers?

Well as you know, there's been several decisions with the California PSC this year, dealing with the direct access customers, as you look at all the issues in California, starting with the DWRs suability to continue to provide energy as their contract expires at the end of the year, to all the issues to California. I can't give you any comfort as to strong stability in California.

Right, OK. I guess I was curious whether the customers that you've signed up have a something like a material adverse change clause that in the event of a large exit fee, would allow them to cancel the contract that they have signed with you?

Well, we have got a lot of contracts and one of the market positions that we have taken, in fact one of the strategies of APS Energy Services is to really focus on those medium size customers, one of the things, that we are very good at, is dealing with some of the medium sized customers and all of the billing and metering and other issues associated with that, so each of those contracts are different and I don't really have, it's not tied to just one contract or just one large customer. It's really a sound of complex collection of medium sized customers.

OK, thank you very much.

Ladies and Gentlemen, as a reminder, to register for a question, press the one, four.

We do have a follow-up question from Craig Lucas with Zimmer Lucas Partner. Please proceed with your follow-up.

Thank you very much for the follow-up question. I'm sorry to ask the same question again, but, I just want to make sure I'm getting it correctly.

Just regarding, looking on that web site of yours, in terms of the gross margin and trading, it looks like, 59 million of gross margins so far this year, is that, is that, can I take that as your trading so far?

Well, you'd have to give me something, if you're going to ask me to confirm the number, you have to show me where you are in the web site.

Third page.

Third page, in what category, and the...

kind of marketing and trading gross margin, break it down.

OK.

And that's what confuses me a little bit, because, if we looked at last year the $2 and look at the mark to market, it goes like 90 cents and $1.10 I guess from a wholesale, and then, so far, year to date, we have 59 million at gross margin, about 44 cents.

OK

And if I were to multiply to 25 percent to $2, I get 50 cents, then we have already exceeded the trading components, seems to be the largest?

These are pre-taxed numbers.

Yes

So, you have 59 million of pre tax

Yes

And the $2 you're talking about, is last year.

I'm just saying last year, you had two bucks, net of tax for trading and marketing and I'm saying the mark to market portion was 90 cents, that leaves $1.10 for the wholesale, and then, if the new guidance is 50 cents for the whole tie, you know, going forward, but yet it looks like there's 50 million in gross margin at 44 cents a share year to date. So that means that it seems that trading is bigger component and not a smaller.

One of the things that I mentioned earlier is that when you looked at this on the web site.

Yes, sir.

That includes APS Energy Services, so you have to remove APS Energy Services, because the $2 that you're talking about did not include APS Energy Services...

Oh.

The 59 million does.

Oh, thank you, that, that solves that problem.

That's also on page five, you can see the break out for ES.

Right.

So, there's ES is what, 14

Correct.

Yeah

So we scored as part of a big number, though.

As you can see for the year, to date, the bulk of the number that we're talking about for this year's trading. If you look at that year to date number in terms of off systems sales, it's very small. That's really is the result and what we had assumed, some six to nine months ago, when we first actually started taking a look at that, I think, we first talked to you about the earnings for 2002 being difficult to achieve though the one levels, in the third quarter of last year, and as we looked at that and particularly if we looked at the forward program in terms of prices, it looked to us as if all systems sales would decline significantly.

And as I mentioned earlier, we're pretty much on that path, as we have seen those prices come down.

OK.

As I mentioned earlier, the change in terms of the literal evaporation of players on the market is having much more of an effect on the trading piece than it is on the off system sales piece. Because the lower price level was basically what we had anticipated and as a result, in our estimate, we significantly declined our off system sales contribution.

OK. And then regarding the third quarter, not to get ahead of ourselves too much but, I think you had $1.77 last year, which I think about 83 cents was trading, in that number last year. So, I guess, what you're talking about, I guess, we'll see the bulk of the impact in the remainder of the year, mostly in the third quarter?

That's true.

OK. Thanks again, thanks for the clarification.

Once again, ladies and gentlemen, to register for a question, press the one - four.

I am showing no additional questions at this time, I will now turn the call back to you, please proceed with your presentation or any closing remarks.

I would just say, thanks for taking your time to visit with us today, we know this is not a good day for anybody, and we know you're very busy, and we thank you for your time.

Everybody, thank you for calling and if you have any follow up questions please let me or know. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today, we thank you for your participation and ask that you please disconnect your line.