Pinnacle West Capital Corp (PNW) 2003 Q2 法說會逐字稿

Good afternoon. My name is Nicole and I will be your conference facilitator. Welcome everyone to the Pinnacle West earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question, during this time, simply press star, then the number one on your telephone key pad. If you would like to withdraw your question, press star, then the number two on your telephone key pad. Thank you.

I would now like to turn the call over to Becky Hickman, Director of Investor Relations, ma'am, you may begin your conference.

Thank, you Nicole. I would like to thank everyone for participating in this conference call or our web cast to review our second quarter results and recent developments.

This call is being web cast simultaneously on our web site, www.pinnaclewest.com and a replay will be available on the web site for the next 30 days. A replay of the conference call will also be available through August 4th by calling 800-642-1687 and entering access code 1571133.

This morning I have with me Bill Post, our Chairman and CEO, Jack Davis, our President and also President of Arizona Public Service and Don Brant CFO of both Pinnacle West and APS. Here's an outline of our call's topics. Bill's going to give you a brief overview of our earnings for the first quarter. Then Don will review the primary earnings variances for the quarter as well as other financial topics. After that, Jack will update you on the status of regulatory developments and some of the our operational results and finally Bill will wrap up with a strategic summary before our Q&A session.

Before I turn the call over to the speakers, I need to cover a few of the details with you. First our web site contains extensive supplemental information on earnings variances and quarterly operating statistics. To help you easily locate all the new information posted today, we have a quick reference menu on the web site for the current quarter and the quarterly statistics section under investor information. The web site also includes comparative quarterly information back to 1999, for your detailed analysis later.

Second, please note that all our references today to per share amounts will be after income taxes and based on diluted shares.

Next, it is 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 caution you not to place undue reliance on these statements. Please refer to the MDNAs in our 2002 annual report on form 10-K and our March 2003 form 10-Q, which identifies some important factors which could cause actual results to differ materially from those contained in our forward-looking statements.

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

At this point, I'll turn the call over to Bill post.

I would like to thank everyone also for taking your time to join us today.

As we said in our press release this morning, we are not satisfied with our second quarter earnings. However, from an operational standpoint, we had a very good second quarter, and with the exception of the power markets which we will discuss with you in detail this morning, we remain basically on track. Throughout our core business, we continue to demonstrate operational excellence, during the quarter, we met the challenges of providing reliable service to customers, in our growing service territory, we completed major regulatory steps including the filing of our first general reg case in some 12 years and we refinanced the bridge debt ha was coming due this summer. Jack and Don will give you more details on our operational financial progress during the call.

I would like to briefly go over our earnings for the quarter with you now and then Don will give you more detail. Our net income for the quarter was 61 cents a share, compared with 89 cents a share last year. Prices for our gas and to a lesser extent purchase power were the major factor that negatively affected the quarter to quarter comparison. The higher commodity prices we paid increased our costs about $22 million. And decreased our earnings 14 cents a share.

As we have discussed since last fall, we expected these last fall, we expected these costs to be higher for 2003, as a whole, compared with 2002, primarily because of the higher prices for our hedges. We put the gas hedges on in early 2001, during the western energy crisis, to limit our exposure to dramatically rising prices. Our hedges capped the commodity prices we would pay to serve our retail customer, thus managing price risk. The hedges were part of our overall program to manage risk while providing reliable service to APS's customers. As a part of that program, we have also built several power plants and thousands of miles of transmission and distribution lines over the last several years.

The results for our marketing and trading segment were relatively flat compared to the same quarter a year ago as shown on our operating statistics on our web site gross margin for this segment was 20 million dollars in the second quarter of this year compared with $19 million in 2002. We had planned for the results of our marketing and trading group to improve somewhat in the second quarter, in part due to new transaction volumes and in part due to the adoption of EITF 02-3.

However as Don will explain in greater detail, we saw the western wholesale markets deteriorate significantly during the last several months. This deterioration adversely affected our volume and new transactions, and modestly affected our mark to market values.

Other factors that affected the quarterly comparison were essentially in line with our previous estimates. The major negative factors included net costs, related to new power plants placed in service in mid 2002, higher cost for pensions, and related benefits, and a rate decrease. These negatives were partially offset by the benefits of our customer growth, which is still about three times the national average, and lower regulatory asset amortization.

Overall, our retail sales grew 2.1% which is lower than we had anticipated. Weather was a significant factor, although in a shoulder period, it is difficult to statistically separate direct weather impacts from other customer actions. The detail sales and other information have been provided to you on our web site.

The outlook for our earnings has changed. This morning, we revised our earnings guidance downward for 2003 to a range of $2.55 to $2.85 per share. The revision was driven by the substantial deterioration of the western wholesale markets over the last several months. Spark spreads are down 15-20%. The market has suffered a substantial reduction in overall liquidity because there are fewer credit worthy counter parties and several key participants have exited the market or scaled back their activities. Based on the erosion in the market, and on the market outlook for the remainder of the year, we currently believe that the contribution from our trading activities excluding the effects of EITV 02-03 will be down about 75% from the 74 million dollars that contributed in 2002.

We expect our earnings growth to resume in 2004. We estimate our earnings for 2004 will be in the range of $2.85 to $3.15 per share. A return to growth is expected primarily because of the completion of the regulatory asset amortization in mid 2004, in accordance with our 1999 regulatory settlement agreement and continuing customer growth in our utility service territory. Contributions from a marketing and trading activities in 2004 are expected to be comparable to the levels included in our current 2003 earnings estimate.

At this point, I am going to turn the call over to Don who is going to review in greater detail our earnings variance, the western market and outlook and some other financial topics. Don?

Thanks, Bill.

This morning, I will cover the more significant earnings variances for the second quarter. I will also provide you with an update on several other financial topics and give you our perspective on the western energy market. After this call, Becky and Lisa would be pleased to assist you in navigating through the greater detail and analysis of earnings variances available on our web site.

Before turning to our second quarter results, I would like to point out that unless otherwise noted, my references to dollar amounts of revenue, gross margins, and expenses represent before tax effects.

Now, I will discuss our second quarter results. We reported net income of 56 million, or 61 cents a share for the second quarter of 2003. This compares with net income of 75 million or 89 cents a share for the second quarter of 2002. Bill has already summarized the key financial factors affecting the quarterly financial results. I will provide you with additional details.

Second quarter regulated electric gross margin was 382 million, as compared to 392 million in the second quarter of last year. This $10 million decline in gross margin was primarily related to increased gas and purchase power costs of $22 million. As a reminder, our discussions of previous 2003 guidance included a decrease of 50-60 million dollars after tax for the higher hedge gas and purchase power costs for all of 2003.

This quarter's results were also affected by a retail price reduction of $7 million related to our 1999 settlement agreement with the Arizona commission. Retail customer growth of 3.1% partially offset these declines with a gross margin contribution of 14 million dollars. Our marketing and trading results were essentially flat compared to the same period a year ago. The positive effects of EITF 02-03 were almost entirely offset by less new deal origination and lower margins.

Two other expense factors have notable impact on the quarter. First, pension and other benefit-related costs increased $7 million. Second, total costs associated with the new generation plants that are currently serving APS retail customers, including O&M depreciation and interest costs, partially offset by reduced purchase power costs, added $8 million of pretax expense to the quarter compared to the quarter a year ago.

Now for an update on SunCor's real estate activities. SunCor recorded net income of about $3 million for the quarter. For the year, 2003, we continued to expect SunCor's earnings to approximately double its 2002 earnings level of $19 million, and remain around this level through 2005. We currently estimate that 15-30% of SunCor's net income in 2003 will be reported as income from discontinued operations. However, the ultimate accounting will depend on the specific properties sold.

Turning to Arizona's economic outlook, growth in the second quarter of 2003 was slightly less robust than expected. We were expecting modest, steady gains in most indicators through the balance of the year. Beyond 2003, we expect customer growth at approximately 3 1/2% annually through 2005.

Now, turning to the western energy markets, and its implications for our marketing and trading business, going into 2003, we positioned ourselves to continue to take advantage of opportunities in the wholesale power markets. However, as we near the end of July, those opportunities have not materialized. In fact, the western power market has continued to weaken substantially over the last few months.

Looking forward, we see limited prospects for an improvement over the balance of 2003, and well into 2004. During the past several months, we've seen a number of negative factors converging to pressure spark spreads and dampen market liquidity. These factors include higher forward gas prices, sustained gas price volatility. Lower Q3 forward power prices, improved hydro conditions in the northwest, fewer counter parties and a continued downgrading of counter party credit ratings.

Let me give you some further specifics on these recent trends. Our expectations for trading in 2003 were based largely on repeating the performance from 2002 with additional margin related to the adoption of EITF 02-03. Our expectations were promised on credit and liquidity conditions remaining relatively stable. Unfortunately, we have seen rapidly deteriorating credit profiles in several key participants scaling back or in some cases eliminating their presence in the market entirely. Wholesale customers have embraced a spot market mentality. We are simply seeing fewer structured transactions. We have only booked about 50% of the origination volume that we had anticipated for year to date June.

Forward Q3 wholesale prices for power had declined in the last few months while natural gas prices have run up. As a result, spark spread have narrowed almost 20%. Also spark spread volatility has flattened substantially reducing arbitrage trading opportunities. As expected, there were and continue to be a number of new plants coming on line in the west this summer. Much of this new capacity has limited operating flexibility once the plants are in commercial operation. In addition, much of this new capacity has recently been in a start-up testing mode, a process where-in operational targets often override dispatch economics.

Again this new capacity was not unexpected. But its impact on the market was markedly exacerbated by the other negative market forces. To illustrate my point, look at July 9th, 2003. The first day this summer that we set a new record peak load. During the offpeak hours of that same day, we were buying substantial amounts of power on the hour at $10 per megawatt hour. Importantly, in the face of these power market forces we remain stead fast in our commitment to risk management, discipline, particularly as it relates to credit quality.

Now, turning to liquidity, financing activity, and capital structure, starting with APS, I would expect the utility to continue to fund substantially all of its capital expenditures with net cash flow from operations. APS currently has no short term debt and is actually in an invested position of approximately $65 million. We expect APS to be in a strong liquidity position throughout 2003. APS issued $500 million of senior unsecured debt in May. The proceeds of this debt issue were used to provide the four-year inter-company loan to Pinnacle West Energy as approved by the Arizona Corporation Commission. The APS debt was a two-tron. Deal of 12 and 30 year notes with a weighted average interest rate of about 5%. The inter company loan proceeds were used to repay $250 million of notes with the remainder repaying short term debt, including a bank bridge loan.

Also, APS recently registered a $500 million debt shelf with the SEC. APS plans to use the shelf to refinance its debt maturities in 2004 and 2005. The parent company had short term debt balances of approximately $100 million at year end 2002. And currently has about 70 million of short term debt.

During 2003, our short term debt balances were expected to increase with the completion of construction at West Phoenix 5, and Silver Hawk. We expect the parent company to end 2003 with short-term debt balances around $100 million. SunCor continues with its plan to accelerate the sale of assets to provide cash distributions to Pinnacle West. We believe that SunCor will be able to deliver annual cash distributions between 80-100 million dollars, through 2005. In terms of consolidated capital structure, we expect our year-end 2003 debt ratio, excluding the PaloVerde sale lease back to be approximately 54%.

Now, turning to our credit ratings. We are proactive in our communications and approach with the agencies. Earlier this month, we visited with S&P and Moody's to provide a financial update and an overview of our rate case filing. We believe that our ratings remain stable across all securities at this time.

In summary, although our quarterly results were clearly not the desired results, we are well positioned to return to earnings growth in 2004. Our liquidity situation is sound. And we remain conservative in our approach to the energy markets and risk management.

I will now turn the call over to Jack.

Thanks, Don.

I'm going to give you a brief update today on regulatory developments at the Arizona corporation commission and a summary of the recent operations.

I will begin with the regulatory developments. I would like to touch on three regulatory issues. The outcome of the track V competitive solicitation process for APS's purchase power, proceeding to establish certain rate adjustment mechanisms and the general rate case we filed on June 27.

Starting with the track V process, during our last conference call, I provided an update on the status of APS's competitive solicitation process, that was required by the ACC's track V order. In a nutshell, let me summarize the track V requirements. Beginning this year, APS was required to solicit competitive bids for billion 2500 megawatts of capacity, 800 of that megawatt being must run generation, and 4600 gigawatts hours of energy which represents about 18% of APS's retail energy needs. In the future, the bid amounts for each year will grow as customers needs grow. On May 7th, we announced the results of our solicitation. We began taking power under the new contracts the first of this month. Our generation subsidiary, Pinnacle West Energy will provide 1700 megawatts of power in June through September of each year through 2006. Additionally, PPL energy plus and pand heat river will provide capacity in varying amounts up to 450 megawatts in the offpeak periods through September of 2005.

We stringently followed the ACC guidelines for the solicitation and evaluation of bids. Furthermore, the ACC independent monitor found the solicitation process employed by APS to be fair and open. And that it was concluded according to the ACC rules.

Accepted bid meets about 75% of APS's solicited capacity needs. The remaining required to be purchased following a secondary procurement protocol secondary procurement protocol is on file with the ACC. It is important to note that without the Pinnacle West Energy assets participating in track V APS would not be able to procure enough capacity to meet the customers' need are this year and the remaining years.

Now I would like to update you on the adjustment mechanisms proceeding. During last quarter's conference call I talked about the details of a docket that is still pending with the ACC, related to the design of the certain rate adjustment mechanisms for APS. These mechanisms including a power supply adjuster will allow APS to recover several types of costs in a timely manner. And agreement on this matter was held in early April. We expect to receive the order sometime early this summer, which would be able to follow the commission decision. The actual implementation of the adjustment mechanisms would be part of the APS's 2003 general rate case which I will discuss in a minute. Therefore a decision in the adjustment mechanism proceeding will not affect APS's customers until the commission makes its decision on the general reg case.

Finally, let me turn to the general rate case. On June 27th, we filed a general rate case that was required by our 1999 regulatory settlement agreement. The filing requests a 9.8% rate increase and 11.5% return on equity. When implemented, the increase would be APS's first price increase in more than a dozen years. Last Friday, we received notice from the commission staff that our file was in compliance with regulation. This starts a time clock, such that number one, we should receive a procedural order within 30 days, and number two, a final order generally within one year. I say generally, since there are provisions within the regulations that will allow for periods longer than one year to receive a final order.

The major items we included in the filing are, number one, updates to our overall cost of service including cost of capital, fuel and purchased power. Number two, rate based treatment for existing unregulated generation in Arizona. Which is already dedicated to APS's customers and offered by Pinnacle West energy. Number three, recover over 15 years of the 234 million dollar write-off we recorded as part of our 1999 settlement agreement. Number four, recovery of cost compliance with ACC's electric competition rules including those we incurred in preparing to transfer APS's generation to Pinnacle West energy, and lastly, there would be rate design changes.

Now, I will move on to a brief summary of our operation. The second quarter continued to be a very good quarter operationally. And our focus on operational excellence and efficiency is ongoing. We continue to have significant growth in our significant growth in our retail service territory. During the second quarter, our customer growth grew 3.1%, compared with the second quarter of 2002. Our growth continues to be about three times the national average. This summer, we established a new record for total system demand on July 14th of 6305 megawatts. So far we estimate that our 2000 peak is almost 9% higher than last year. We met the new -- we met the new peaks without operational problems. It is also possible that we may set yet another record peak remainder this summer.

Our power plants performed superbly in the quarter. The new capacity factor was 86%, which although lower than the 95% last year's second quarter, primarily reflected a difference in time planning and refueling gas. The coal plants 81% up from 72% a year ago because of the timing of maintenance overhauls.

The amount of electricity produced by our gas plants was more than twice the output a year ago. Primarily because of the new efficient capacity available from the Red Hawk units that we placed in service last summer. The refueling out at power unit three this spring lasted 32 days and ended on April 30th. This fall, beginning September 27th we will replace the steam generators in unit two during the refueling outage. As a result we expect the outage to last about 75 days.

Our construction activities are also on track. West unit 5, a 530 megawatt plant in the Phoenix load pocket is operating at full load and our intent is to declare commercial operation at the end of this month. Construction at the 570 megawatt Silver Hawk plant in southern Arizona is progressing toward the 2004 start date. Replace of line service in June of this year and I'm glad we did. The line is critical to ensure liability of customers this year. And Arizona transition to the mayor load areas can be limited and can be deliver power from new power plants to the southwestern Phoenix area. At the federal level we are continuing to work with other utilities in the Reg ton comply with the mandate and also active participants in the market design initiative and Congressional debate over the energy bill. Just last week, we lost control temporarily of cooperative effort with a diverse group of utilities to establish a common platform known as oasis for the posting of available electric transmission on the Internet.

In summary, I am very proud of our operational excellence and I am sure you will continue to maintain working with our high standard and working with our regulators to constructively address regulatory issues.

This concludes my remarks, I will turn it back over to Bill.

We are a vertically integrated electric utility and becoming more so as a result of the ACC decisions over the last year. We consistently met the challenges of providing reliable service in an area with customer growth three times the national average. We're on track, as Jack just said for operation of west five this summer and Silver Hawk next summer. A solid track record of working with our regulators, we've managed market rivs, and we've provided our customers the generating capacity to meet their growing electricity needs while reducing prices 16% over the last ten years. Through these efforts, and others, we remain tenaciously focused on making money for our investors.

That concludes our prepared remarks, and now we'd be glad to answer any of your questions.

At this time, would like to remind everyone, if you would like to ask a question, please press star, then the number one, on your telephone key pad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Andrea Linglov, of Angela Gordon.

Good morning. Just a couple of questions for you. First, on SunCor. I just want to make sure I have some of the numbers correct. Year to date net income at SunCor is $4 million is that right?

Yes.

And the target for the year is $38 million?

Thereabouts, yes.

You can talk a little bit about, the way that those earnings are spread, and why they are so back end loaded? And you know, what comfort level you have with the magnitude of hitting that target given where are you year to date? That's my first question. I have a couple of others.

Well, they're loaded based on the presumed transaction dates. And the preponderance of the transactions are scheduled for the second half of the year, and we were fairly comfortable, we've got transactions in process, at this point in time.

Can you -- given that the transactions are -- appear to be solid and somewhat scheduled already, can you give us a sense of whether or not they're more loaded toward the third or fourth quarter or evenly distributed?

More towards the fourth quarter.

Okay. And then when you talk about the weakening of the western power markets, that you know, is really driving much of the discussion, this morning, can you talk about how much of the change that you've noticed has occurred since the last time that we spoke, I guess on the -- the last time you guys had a conference call for the quarter, and versus how much were you talking about those changes being year over year changes? I am trying to get a sense of what changed the last few months versus the changes you're noting year over year. And then I have a couple our follow-up, sorry.

Okay, Andrea, let me back up to SunCor. The $4 million you quoted that was correct for continuing operations. We've got $6 million of profit coming from SunCor on discontinued operations. So the total SunCor year to date is $10 million. Just --

That's helpful. Thank you for pointing that out.

Yup.

And excuse me, just to make sure I'm clear, on the 38, 3 million would combine both the discontinued and the operating?

Correct.

Okay. Thanks. Thanks.

Relative to the western markets, most of the declines, probably have been over the last 60 days. It is -- we've seen a couple of major counter parties essentially exit the market. More credit downgrades as a matter of fact, S&P came out with a piece you might want to look at this morning or Friday, bash Bryceman wrote it about the accelerating credit downgrading in the industry. And then we also saw in the the last month or two the collapse of spark spreads. From what they were three months ago.

From that perspective, then, can you talk about why you're not currently expecting a deterioration year over year in trading and marketing earnings as opposed to to the flat expectations that you currently have for that business?

Well, we've got a meaningful component in existing structure transactions, that were originated in the last few years that continue. And we've got an earnings stream coming off of that. We also have the offsystem sales of units that we will see meaningful contribution in the third quarter and also in the fourth quarter.

Okay. Last question and I will somebody else go. Can you just talk about what you're seeing in California related to your retail product? And what your outlook is for that business, given what is going on there?

It has been steady. We've been -- that component of business has been renewing contracts as they've expired at reduced levels of margins from when they were entered into 18 months to two years ago. But we continue to see a contribution from that business going forward.

Thanks very much.

Okay.

Your next question comes from Greg Gordon of Goldman Sachs.

Thanks, can you guys hear me? me?

Yes, Greg, good morning.

Great. A couple questions. One, you talk about the hedges that you put on, and -- in 2001. Were those hedges in the money or out of the money relative to where you would have had to buy gas if you were buying spot?

Second quarter, we were out 2001. Were those hedges in the money or out of the money relative to where you would have had to buy gas if you were buying spot? of the money. Currently, some of them are in the money. At this point.

Great. And second question, it seems that, and correct me if I'm wrong, the two areas where you were significantly off vis a vis your prior expectations were one, bargaining and trading which you've obviously gone through in prior Q&A but also two, modestly lower organic sales growth is. That a fair estimation, the other costs and revenues that came in, that were different from the prior quarter were pretty much expected? Is that correct?

I think that's about right, Greg.

Thanks. And then third question, just sort of a longer-term question, it seems that the developments in the power market in the west from your perspective are awfully troubling. And while they do -- they hurt your ability to sell power offsystem because there is not a lot of credit worthy counter parties not a lot of liquidity, doesn't that also cloud the ability of the utility to, you know, effectively source plan, if the commission chooses to put in a structure where you're outright basing the assets? Maybe you can talk about what is you see as the longer term outlook for the power markets and why you're so convinced rate basing the assets is the right choice for APS.

You bet. And as we talked last quarter, you're starting to see some of the impact of what we talked about, where you're seeing company after company become much more pocket-driven in the west. So in terms of having a broad-based market here in the west as we discussed, we're seeing more and more movement to individual markets. The transmission is a major issue. The continued political impact as a result of what's going on in California, what's going on at FIRK, as a result, what public power may or may not do, is continuing to produce markets that really can't be generalized. And that is from our standpoint how we see this market over the next few years. It is really going to be a market built of many pocks, not just one generalized common western market.

Greg, I might add a little bit relative to the marketing business specifically. Relative to -- and the credit downgrades, that's been a substantial negative impact, but overall, the short-term focus of our target customer in the munis and the co-ops, that we do business with, and are very able from a credit standpoint able to do business with those kind of counter parties, they've just got this market mentality right now where they're seeing prices, there is hardly any spark left in the market, they've got the -- I think artificial comfort from the FIRK price caps, so they feel pretty comfortable. It wouldn't take a lot, and I don't want to throw out false hopes but we've got about two to three more weeks worth of hydro in the west and that's gone, and California will peak in early to midsummer most likely, it wouldn't take a lot to turn the price environment around, you know, dramatically. We're not banking on that in any way relative to our earnings guidance. But it is a pretty volatile situation. And it wouldn't take a lot to turn it around.

And Greg, that's, as you recall, we talked about that in the meetings that we had with you three months ago, we have not changed our position on that.

Thanks, guys.

Thanks, Greg.

Your next question comes from Jeff Gildersleeve of Argus Research.

Great, thank you. Good morning.

Good morning.

It if you could just -- it might be a little repetitive, but I didn't hear everything about PaloVerde. I know there is the outage coming up this fall. But how has the performance been so far this summer? And if you could just reiterate those comments regarding the outage this fall. That would be great.

Yes, the operation of PaloVerde has been superior so far this summer, no outage or anything associated with PaloVerde this summer. There was a difference quarter over quarter as I mentioned in my prepared remarks, comparing the capacity factor to second quarter this year compared to second quarter last year primarily due to timing of outages and lastly I mentioned September 27th, we will begin a over quarter as I mentioned in my prepared remarks, compares the capacity factor to second quarter this year compared to second quarter last year two to replace the steam generator along with other -- the other items that are normally included in an outage.

Okay and then looking into '04, are there schedules already set for that?

Then after the steam generator outage in '04, you would go back to two outages, one in the spring, one in the fall, and somewhere around the mid 30 to high 30 days link.

Okay. Great. And then perhaps Jack could comment on this. The rate mechanism you said you expected ALJ order or ALJ recommendation this summer. Can you be any more specific on perhaps the timing of that? And any developments?

I really can't be. We've been in contact with the commission staff and they've given us no guidance as to what the expectation of the date of release would be. About the best I can say would be hopeful would be sometime this summer. Either way, whatever the recommendation is, and the ultimate commission order, the implementation of that would not happen until completion of the general rate case.

Sure. And does the procedural schedule, is that due out today?

No, what we've -- what we got on Friday was a notice from the staff that we are -- file made in June was sufficient. In other words it met all requirements of the filing. And that starts our clock ticking, such that within 30 days we would have a procedural order. Now, we fully expect to have discussions about that long before the 30-day period.

Okay. Great. And then finally, on SunCor, looking longer-term, I believe the comments said you expected earnings this year to continue in '04 and '05, at a similar level. Is that correct?

Correct. And then of course new rates would be effective in '04.

And in '06, is there some strategy shall I know it is much longer term, but strategy to replace the SunCor earnings or any sort of share buy back following the rate case?

I think you're right on target with your long-term comment. I mean to try and predict that now, in '06 I think would be premature.

Okay. But that's -- that's clearly something -- I mean you have a lot of these near-term challenges of the rate case, so -- but that would be something that would come after to try to fill that gap?

Yes. It is -- at this point, to try and predict out to 2006, as we've said this morning we've got many issues that we're dealing with and I think it would be premature to do that.

Very good. Thank you.

Thank you.

Your next question comes from Terri Shue of J.P. Morgan.

Yeah, hi. I'm out of town calling from a phone booth. So if the reception is not too good, I apologize. I don't have everything in front of me.

Talking again about the earnings short fall, I was reviewing notes from the prior quarter, and I think then the general guidance is three dollars, plus or minus some. And then I think the discussion was 90% of the earnings coming from the regulated APS operations and 10% from other. The short fall therefore, and going back to one of the earlier questions, is trading and marketing, instead of contributing maybe 30-plus cents per share, quite a bit less than that, and there is also some short fall on the utility side, because of the combination of lower sales growth, and cost pressures. Which most -- most of which you had known about. Is that sort of the way to look at it? Because it is a lowered guidance.

It is, Terry with the one caveat that I mentioned, and that is the sales which are detailed out on the web site.

Right.

The sales for the second quarter came in lower than we thought.

Right. But for the full year, clearly you're also setting your sights lower. What would APS's regulated return look like in your scenario now? It would be quite a low number, right?

The --

If you come in at the lower end of your guidance.

Yeah, the -- the filing that we made for the --

Yes.

For the commission was on the test year 2002.

Right.

And if you were to update it for the two quarters so far this year that number will have gone down.

Okay. What is your trailing 12 regulated return as of mid year? APS's regulated return?

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

But it is probably short of 10%, I would think.

I would hesitate to guess at it. But it certainly has gone --

And in terms of assessing longer-term earning power, I suppose one way to look at it is to look at 2004 and say that APS's book value, around that time, if were you to get everything you want, getting the plants back into rate base, and the gradual restoration in some of the deregulation costs, I think you said amortized over 15 years would be, I calculate a theoretical earning power, if were you to get better than 11% allowed ROE, of something in the low threes. Does that sound about right?

Without going through the math, it is it is intuitively right, Terry.

Right.

But it -- you know, from the comments we made earlier, you know, APS remains basically strong. We've seen some fluctuations here, but APS remains basically strong.

But the problem is, it's strong, however, it is kind of under-earning. Relative to recent years' history where you have had -- there are some years where you had pretty healthy earnings.

That's right. And when you look at -- you know, one of the things -- and we don't want to get into a whole bunch of detail around this, but because of the changes in organization, in terms of how we describe APS, as you know, last year, power marketing was outside APS.

Right.

This year, power market something inside APS.

No, I understand that. Is just that overall APS is having, even though operationally strong, meeting all your challenges, getting all the cap structure issue, liquidity issues all resolved, from a shareholder standpoint, it is not quite performing up to your standards, in terms of delivering relatively attractive returns. That's a fair comment, right?

Our costs have continued, as you well know, since the 1999 settlement, our costs have continued to go up. Particularly in the last year when you look at purchase power and gas prices and that's right on point with the filing we made with the commission and that's what we're going to be dealing with.

That's what I mean. Like current years you have enough challenges which have kind of really eaten into your regulated return, viewing APS as a regulated entity.

That's right and they're all in the rate case. If you just look at the pension impact, I mean as we talked to you about in the third quarter of --

I understand that. It is just again looking forward, to assess earn power, assuming that the commission recognizes all your good performance serving your customers, et cetera, that at least we can look out to say that there is going to be some level of recovery from your currently relatively depressed levels.

You can count on the fact that we're going to make sure the commission understands every single one of those and that's what we're aggressively working on.

What does this all mean in terms of continued dividend progress during this -- I don't mean maintaining the dividend, but some modest or moderate amount of increase, are you even thinking about that? At this time, given that the payout ratio has risen, because of the E part going down.

The dividends always something we look at in the fall in detail.

Right.

And we're going to do it again this year.

All right. But really no particular comments at this time?

No.

Okay. Thank you.

Thank you, Terri.

Your next question comes from Paul Patterson of Glenn lock associates.

Hi, can you hear me?

Hi, Paul.

Hi. I just wanted to clarify something. What is the earnings expectation you have for the trading and marketing business for 2003 and 2004?

As we said in the comments earlier, we look at it as 75% of what are contributed in 2002.

Okay. And then for 2004, what do you expect?

Flat.

You expect it to be flat? Okay. And then could you just --

That's because as Don pointed out to you, you got to keep in mind that category includes structured transactions that occurred years ago.

Okay. And then the other question I wanted to know is what is the accrual versus the origination on mark to market, earnings impact for the quarter in the last six months?

8 million.

8 million per accrual?

8 million pretax that we booked on accrual basis as opposed to mark to market a year ago.

That's for the quarter?

For the quarter.

Okay.

16 for the year to date.

16 for the year to date?

Huh?

I'm sorry I didn't hear you.

16 for the year to date.

Okay, great and obviously just subtract the others and we get the mark to market number. Thanks you very much.

Thanks, Paul.

The next question comes from Jim Von Riesemann of J.P. Morgan.

Hi, Bill.

Good morning, Jim.

You can talk about Washington, D.C., what is happening there, and how that might impact your business, if A, if obviously if the energy bill goes through with electricity and how the public power issue is going to come into play and what that dose strategically for you all?

Sure, let me just get to the bottom line of that real quick. The impact for us there in the west is the impact public power is going to have on the wholesale market that can come from two different points of view. Is one is that if it does not pass, then we are going to basically continue the path that we have been on. If it does pass and it has what is described as FIRK light in it, we see little, frankly little change there with public power. And given the fact that Congress will have acted and will have a new legislation dealing with energy, we do not see an opportunity -- or wouldn't see an opportunity for any other legislation after that for quite some time.

So that's one of the reasons why we say what we said earlier in that we see this pocketed nonhomogeneous, wholesale market, with public power continuing to have significant influence, and if the energy legs lace passes, as you know, it has delays in it for SMD, at least in the Senate version and who knows what comes out of conference, but in any case, we see less movement to an overall liquid pervasive wholesale market in the west.

Let's assume that the legislation passes for a moment here. Does that allow you -- can you change your regulatory filing at this point in time to make any amendments from anything strategically for the company?

No, but I -- I would have to give you a few assumptions there. Because if it passes it kind of depends on what is it in it.

Right.

And one of the things that would have a significant impact is if what's -- either described as native load protection or the preservation of transmission for existing customers, was somehow negatively affected. It doesn't look like that is going to. If that did occur, there would be changes.

And you could amend your rate case?

Yes, sir.

Okay. Is there any -- and then on a separate question, there is a recent Kennedy school paper on water policy in the west, I don't know if you saw it.

I did not, Jim. I would like to.

But it talks about how poor water policy has basically led to the problems with growth out in the west. Are you seeing any implications on the political side where politicians in the Arizona area are trying to curtail growth?

No, not as a result of water. In fact, the reverse is true. The Salt River project here, there is the second year in a row they have actually decreased allocations but we are not seeing any impact in terms of growth in terms of water, that is not to say that is not a long term issue, what is a long term issue, but at least so far we haven't seen any impact there.

And I guess as a final question, your revised earnings guidance considers the -- how hot is it scenario in July, into your outlook, right?

Well.

Well, 59 for a low is pretty high in my opinion.

It is. Are you in Tucson, Jim?

No, thank God.

We've had a very warm July, and it has been warm not only in terms of high temperature, but in terms of low temperature, as Jack said our peak load this year which beat our present -- our expectation by a significant amount, and as Jack said we're up some 9% over the previous year on peak, we have seen, unlike the first six months of the year, we have seen significant increased consumption as a result of the weather in July.

Okay. Thank you.

Yes, sir.

Your next question comes from David Thickens of Deep Haven Capital Management.

Good afternoon or good morning there.

Hello.

Hi. Can you talk a little bit about how changes in the way that the SunCor earnings will be reported, specifically what's coming in as continuing operations and who is being reported as discontinued, is behind any of the changes in your earnings guidance? I know that there are some kind of funky rules about what you can include in guidance and what you can't.

No, the differentiation between the two hasn't factored into our guidance. We haven't included all of it in our guidance.

Okay. All right. Rest of mine have been answered. Thank you.

Your next question comes from Steve Fleishman of Merrill Lynch.

Yeah, hi, gentlemen.

Good morning, Steve.

Hi. I guess a couple questions. First, if you look at the difference in your forecast is it primarily the lack of origination activity versus the lower-than-expected spark spreads, would you say?

Yes.

Okay. Because one of the perplexing -- if you look at -- not that the publications on pricing data are great, but if you look at Bloomberg or plat's or any of these marks, they're showing higher spark spreads in the west, higher power prices in the west, generally, than pretty much any other market. So it teams to almost fly in the face of a little bit, at least on the power market condition, unless they're just not picking up the reality of the day to day, hour to hour market conditions. Can you just address that?

Yes, Steve, we have seen differences between what we're actually transacting and what gets reported. For instance, that day, July 9 I mentioned, the offpeak prices of $10, we were booking $10 power in large quantities for seven hours straight. The reporting services picked up the lowest price that day being offpeak of around $30. We reported the 10. What happened of to it after that, I can't begin to speculate.

Some of the sparks, let me just walk you through. What we're see something PaloVerde on peak is running mid 50 at best. And it is pretty flat across the entire peak period, also. But say, take a PaloVerde onpeak of 55, and I just worked through this Friday morning, we've got, you know, Henry hub prompt month was at 472, add about a buck for -- to swap the basis to a western basin, transportation and taxes, and with a 7,000 heat rate, and then throw in say $2.50 of variable O&M, you're at a variable cost of 42.50. And leaving a spark of just over 12 dollars.

Okay.

And we did similar thing, go back to the March period, we were at times $20 sparks.

Okay. And I guess, you know, Bill, last time were you in New York, you talked about the west potentially really being short.

Yes.

Sooner than people thought. And obviously, you also talked about the fact that very few people bid into your RFP. Not as many as you thought. So all these data point, I'm having trouble understanding kind of what the message is. I can -- Between those things, and then seeing why people would be dumping power at $10.

They're -- I think there's several things, and you're right it is tough when you try and generalize these markets because that really, I thinks is go be to be the issue as we go forward. It is going to be individual specific pockets of load in the west. Let me just hit a couple of comments or make a couple of comments and hit on a couple of points as we talked three months ago, we remained convinced of the position we described to you in that we do think capacity in the west will become an issue sooner than people think. That is still true from a long-term standpoint. If you look, for example, though at the second quarter you don't see that.

And one of the things that impacted us, as Don talked to you about, was test energy. And there, you have quite a bit of new construction that is coming on line right before the summer. And a lot of that test energy is coming out of those plants not as a function of the market, but literally as a function of the requirement to get to commercial operation. So you're seeing what wouldn't normally be a continue if you had the dispatch algorithm in place taking a look at what is impacting your prices, but we saw a significant impact as a result of that. So you have there, you got in effect two conflicting issues, that are overall impacting the quarter in the short term.

As Jack talked to you about, we did see fewer bidders than we expected with track V, and I think that is an indication, and it does to extent validate what we had mentioned before that, in that we expected capacity to become a problem sooner than people thought. So it is tough to generalize. And we are going to get into more specific analyses quarter by quarter, area by area, in the west, and I think that is going to become more the rule than just looking at generalized prices applied to the entire western region.

Okay. But just to clarify your comments one more time, you're obviously incorporating your experience that you have seen so far in July, even with this record heat, as Don mentioned is one day, into kind of the comments you're making today?

Well, into really Jim's question, as to whether or not we've factored July no our earnings estimate, we have not factored July into our earnings estimate. We are taking a look at kind of the overall picture, without explicitly telling you where we stand month to month. So I don't want to give you the impression that we've taken July and we've factored that in. We haven't even closed the books of July yet. So on the other hand, are we taking a broad picture of the whole year and looking at all the factors? The answer so that is yes.

Let me restate -- are you taking a picture into July in terms of making your broad comments on the broad of the power markets out there?

Yes.

And I guess, I guess my other question would be on the -- on the APS side, I mean most of the higher -- most of the factors in that business would seem to have been known pretty much, you know, from the beginning of the year, or late last year. I guess I'm still a little confused on that part of the business, what if anything is really different.

Different than?

Than --

Than last year?

Than forecast to forecast.

Okay.

Because we obviously new about the higher hedge gas prices. If anything, if prices were so low, they could have been in theory buying cheaper purchased power at these higher prices when they need it.

Yeah, basically it boiled down, as I think Greg Gordon talked about a little earlier, it basically boiled down to those two issues. The overall impact in the power markets, which we didn't anticipate to the degree we do today, three months ago, as Don described, and when you look at the changes that occurred in the last 60 days, you can understand that. And the impact in terms of weather. Our sales were up 2.1%. If you look on the website, you will see residential weather-adjusted usage was down over 2% and commercial was down as well. So those are two significant factors in terms of taking a look at the year.

Okay. Thank you.

Your next next question comes from Jason West of Deutsch Banc.

Hey, Bill.

Good morning.

Good morning. I was just wondering if cue talk a little bit about what drives the range in the drives the range in the earnings guidance? You know, sort of what are the major factors that would put you on the low end or the high end and if you can say where you feel like are you today looking at that range.

Well, we -- we do our best to try and, as you know, we change from the estimate that we had last time, where we provided in effect a point estimate with a reasonable range around. That and because of all the dialogue we had had in terms of differences of opinion of what was reasonable, this quarter, we actually put a range around it. Now, that is not to say that that includes 100% confidence interval around that range. But it is to try and get a sense of the various issues that go into trying to estimate what those earnings are.

So really from the standpoint of a reasonable range, we haven't changed our opinion from what we've had before. It is just now we're more specific in terms of what that overall range would be. As far as individual items that swing it either way, it literally covers the gamut between weather and the power marketing issues that we've talked about. And when you give consideration to changes in legislation, and regulatory structure, you can see the kind of volatility that we're working with.

And I don't know if that answered your question, or you want me to be more precise about individual items, but it is basically our sense of the range that could occur as a result of variables that we can't control.

Right. And I mean, I guess since we're six months through the year here, I mean just looking out, would you consider the low end as a conservative number, or, you know, is that just as doable as the high end?

It speaks for itself.

All right. And can you update us sort of on what you expect sort of the utility earnings to be there this year? Are you still looking at 90-plus percent from just the utility or can you tell aus little bit how that breaks out, regulated versus unregulated earnings?

I think generally going forward, that 90/10 split is indicative -- I don't want to focus just on '03 results, and it wasn't meant, I don't think, initially when we used that terminology, but just to give a perspective of the company longer term. And the focus on our core operation, the regulated operations.

Okay. So that is not necessarily applicable for '03, the 90/10?

No.

Okay. And then the last thing, just something that, you know, I think about quite a bit, I was just wondering on the -- from the fuel and purchase power stuff, you have a lot of exposure there, I think you said you're still about 15% unhedged of utility, and I was just wondering if what is what sort of swings the guidance to some extent, just making an assumption of where you're going to be buying gas and power for the rest of the year and next year. Or is that sort of locked in, and I shouldn't worry about that moving around too much?

When you said 15% hedge for what period of time were you talking about? For '03?

I believe Jack said that under track V, you guys are now 85% hedged for '03. I believe that's what -- he didn't really say a date.

Right. And we're comfortable with that 15% or thereabouts going forward. We need that much flexibility, rather than locking it in 100%.

Right. Right. Okay. Thanks a lot.

Thank you.

Your next next question comes from Michael Goldberg of Luminous.

Good morning, guys.

Good morning.

Just wanted to once again touch on the topic of gas hedging. And power procurement hedging. For the second half '03, you have hedged what, 85%, is it?

There abouts.

What about 2004?

2004 is somewhere in the 150% range. That 85%, it -- 50% range. That 85% we're higher than that, right now.

2004 four, 50% of gas plus power is hedged?

Thereabouts, yeah.

And when -- you have a contract with your unregulated unit, who bears the variability in the cost of gas in that contract?

We do.

The -- APS?

APS, yeah.

Okay.

Those with the with the offpeak units totaling agreements.

So when you say 50, that's not included, right? You consider that unhedged?

No, from the APS standpoint, we're looking at supplying gas for those units so that would be part of our hedging.

Okay. I see. I see. That's perfect. I'm sorry, I missed part of the call. What the latest on your fuel pass through clause? What's happening there?

Where we sit today is we expect a recommended order to come from the ALJ sometime this summer and then subsequent to that a commission decision. That's about the best I can give you in terms of timing but I want to remind you that irrespective of the final decision by the commission it would not be implemented to completion of our general rate case that was filed in June.

Absolutely. But we may have a clearer path of that question before the rate case?

We would hope so.

Okay. Just a couple of other questions. One would be on SunCor. I guess what is it, a third will come from discontinued ops? A third of earnings this year?

Well, I said 15 to 30%.

Okay. I'm sorry. Yes, 15-30. Now, with that in mind, I understand that you will be selling more real estate in 2004. Would you expect SunCor to once again bring in about 38 million?

Thereabouts, yes.

Okay. So that was basically guidance for '03 and '04?

Right.

And my only other question would be given the deterioration of credit ratings of a lot of counter parties in the western markets, why -- I guess in my view, given your position, you could become the premiere market maker, I guess, make buying contracts from the lower creditors and selling to utilities, and making a spread, because you have such high credit rating. Any chance of taking advantage of that, or am I not understanding how the bond markets work? I guess my view of other counter parties have bad credit, if you're willing to take some of the risk you can really capture some of their earnings.

Well, you hit on the point there, we're generally not willing to take that kind of risk. Yeah, there is a lot of opportunities out there, and basically, we're not in the credit sleeking business. That's -- there is potentially profit there but that's risky business and riskier than our appetite.

Okay. So if I'm understanding -- if I am to understand correctly, part of western market deterioration is a -- obviously there is a lot of overbuild, and more units coming on line, right? Even through the summer. So that potentially may lead to further weakening of spark spreads?

There is not much more to go, when we're at the 10 to 12 dollar park.

And on the second point there is really no liquidity in the western power markets because no one is stepping in to kind of make the connection between the lower credit rated suppliers and high credit rated utilities? No one is acting as the market maker and source of liquidity?

I don't want to say there is no liquidity. There is some liquidity at substantially diminished from what it was just in 90 days ago. But what you're talking about sleeking, you know, credit, some of the banks have an appetite for that. And are doing some of it. We've seen some of the major banks move into the market and that's something they do. I mean that's their business of managing credit risk and understanding it, and they're able to lay it off. We're not in that business. I mean we see a little of that going on.

I apologize. One more follow-up. You've mentioned that you added a new transmission line.

Yes.

With the transmission line in place, do you think some of the transmission pressures will alleviate? Or is there still too much generation for transmission in the PaloVerde area?

There is still too much generation for the transmission in the PaloVerde area. That into line only added about 1300 megawatts of additional additional transfer capability from PaloVerde east into the Phoenix load center.

Okay. Well, thank you very much.

Your next question comes from the Abdula Morters of SAC Capital.

Good morning.

Hi Abdula.

I do have a few questions for you, first I want to clarify from Don's comments on discontinued operations, at SunCor. You said about 15-30% of the targeted, like, maybe 38-40 million dollars is considered discontinued operations, but you're included -- included that percentage within your outlook for 2003?

That's correct.

And is it a similar amount for 2004 that is also included? Or is it -- does it change at all?

We haven't really evaluated that yet, Abdula, it is the accounting rules that produce those results, and it is a little unusual in the real estate business. And it is dependent on you know, what exactly is sold as specific properties, whether it is the whole property, what kind of contract is related to the sale, so we tend to, from a management perspective, look at the earnings as a whole, and leave it to the accountants to break out what has to be reported as discontinued operations.

I'm wondering, in relation to a prior question, given the acceleration of the SunCor sales, is it -- is the idea then but by the end of '05 it will be liquidated such that the earnings stream and cash flow stream will need to be replaced?

You know, when you look at the plan that we laid out last fall, what we said was we were going to start an effort to accelerate the, in effect, the velocity of the entire asset cycle at SunCor. And that was put forward as a three-year program. It does not completely diminish the company and so there would be a company at the end of that, three-year period. We have not made estimates about what SunCor would be after the third year.

Okay. When you were in town, I think back in May for your share analyst meetings, you went through various drivers in terms of 2003, versus 2002, in order to support the previous outlook and one of the factors you indicated at that time was higher gas and power prices and at that point you indicated you thought it was about a 50 to 60 million dollar incremental ex increase from '02 to '03. Given the current experience right now what would you estimate that number is likely to be now?

Still in that range.

And that is the same number we gave you in the third quarter of '02.

Okay. So I guess then, you know, the -- then you're basic attributing the entire short fall again to marketing and trading and origination and those things as opposed to -- and maybe some modest reduction in retail growth?

No. If you're talking about the short fall for the second quarter --

The short fall basically for now what the outlook is for '03 versus '02.

Okay. That is correct. That is not true for the short fall in the second quarter.

Okay. And in terms of retail growth, utilities is about 40 to 45 million dollars, what you planned on what are you now thinking that is going to be running at?

Well, we're off, you know, from what we're off in the second quarter, and then just go forward with that number. And actually, you know, the -- as Bill alluded to in his comments, how much of that is attributable to the falloff in growth versus weather and estimating weather in the shoulder months tends to be a difficult task.

Okay. Don, to get your comments in terms of explaining kind of the functioning of the power markets, were you talking about how in the offpeak, you are able to, you know, be buying power, you know, like $10 a megawatt hour or whatever, is that from -- is that the price that you're able to obtain power from the track V contract for the offpeak from PPL and panda? Are they selling to you at that price?

No. Those are -- the offpeak panda contracts is the nonpeak summer months. The balance of the year. No, this is just on the -- on the power markets in general, and the hourly market, not under a contract. And I will add that we actually -- I mean those were the prices on July 9th. We actually saw prices as low as $8. But recently offpeak pricings come back up around the 30 to 35 range.

Okay. And just so I understand terms of the other track V contracts for PPL and Panda, those are dispatchable by you, you call on them, and if you don't call on them, they don't get paid anything -- they don't get paid anything. Is that correct?

This is Jack. There are two different kinds of contracts and they do get a -- like a call premium. Even if we don't call them, there is something we pay. It is a small amount.

Okay. And but it sounds like with these kinds of offpeak prices and everything like that, you know, and the functioning of the markets does this appear that you are going to be need to be calling on them in any extensive fashion at this point.

Certainly the pricing that was negotiated at the time we signed the contract was dependent upon the market at that time which is now said -- the nonpeak summer months, -- as Don said, the nonpeak summer month, basically the winter months, and it is done in such a way that we bring the gas, so we kind of control the gas price as it relates to when we auction what -- whether we choose the option or not. So we are in control of that price. So if we get $10 prices in the middle of the winter, we probably won't be exercising that option.

All right. And that covers it for now. Thank you very much.

Thanks.

Your next question comes from David Grumhoss of Copia Capital.

Good morning, guys.

Good morning, David.

One remaining unanswered question. On the this hedge that you all have in place that you put in place a couple years ago, does that expire this year or does it keep running? Has the status of that going forward?

Yeah, we've got at least another year on that hedge.

At least another year. So similar impact to next year on next year's earnings as on this year's?

Yes.

Okay. Great. That's all I had. Thank you.

Thanks.

Your next question comes from Philson Yim of Morgan Stanley.

Hi, guy. My questions have all been answered. Thanks. Actually, one thing. Looking at '04, earnings guidance, would you be able to hit the 285? Is that kind of intrinsic growth, you know, not assuming any kind of outcome in the rate case or is that a status quo type of growth? And then 3.15 would be a an incremental positive from the rate case?

Well, let me comment. Our overall guidance for '04 does not reflect any kind of a rate impact. In other words, we are not assuming in that guidance that we get any kind of a rate increase. So that guidance is given assuming flat rate levels.

Okay. Why is that? Is that -- is there a higher probability than the rate case drags in through the end of '04?

Yes.

Okay. Thanks very much.

Your next question comes from Rick Shobeen of Duquesne Capital.

Hi actual in is Zach Schreiber. Can you hear me?

Hi.

I wanted to follow-up on Steve's question earlier in terms of some of us on Wall Street, many miles away, from V-gotten excited about spark spreads in the west. And I mean is there any way to sort of reconcile at all, are there certain sources that you use that are maybe more accurate than the Bloomberg? And we've maybe mistake-relied on that shows a very robust PaloVerde spark spread is there any way to get around this one dollar per MCF transmission of gas, transportation basis, swap, at or around the NHI hub? I guess that is the first question.

Well I mean that is kind of a rule of thumb. Not just a basis but transportation cost, and taxes. And the different components vary but a dollar is a good number. How to get around the shortcomings? Start up your own trading desk, Zach and what you're actually buying and selling at and what kind of prices you're getting quoted.

Got it.

But --

Okay. And this $12 per megawatt hour spark spread, I mean that is sort of summer on peak. Is there any visibility on where -- on a liquid basis, you guys actually see that, you know, for the rest of the year, for calendar '04, given that, you know, a lot of this rate basing won't occur probably until mid late '04 at the earliest, you know, or is that just not liquid at all?

I'm not quite sure I understand the question, Zach. Maybe you can --

I guess, you know, where do you guy sees calendar '04 spark spreads and not based on some sort of bad quotes on a screen but where do you actually see them being transacted at? In PaloVerde.

Well, these levels moving up a little bit, but not by much. And we, in our forecast, our guidance, we haven't assumed any kind of meaningful improvement.

So these levels take that $12 and allocates -- is that the time weighted spark spread or is that just the peak spark spread.

Peak.

Is there any sense to what it is on a blended time weighted basis?

Not that I've got handy here.

Is it materially different?

I don't have that really handy.

Okay.

I don't want to speculate and be wrong.

I will follow-up on that one. In terms of the second protocol, in addition to the track V, can you shed a little bit more light on that?

Yes, the secondary protocol for track V, is a set of procedures that we have filed with the commission staff on how we would accept bids from our affiliate.

Got it. Okay. Thank you so much.

Your next question comes from Teresa Ho of Banc of America Securities. Teresa's question has been answered. Your next question comes from Tom O'Neil of Lehman Brothers.

Tom O’Neil: Good morning. I was just curious the structure trades that you talked about, the $20 million or so, how do those roll off --

Relatively long term. Go off a number of years into the future.

Tom O’Neil: Okay. And then the gas hedge is '05, that bad gas hedge should go away?

It is there but we've got a year or two more on that hedge.

Tom O’Neil: Great. Thank you.

Again, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone key pad. Your next question comes from Greg Gordon.

Sorry, guy, one follow-up and I know this has been a long call. There was an order issued out of the FIRK, I think the first or second week of July, with regard to pipeline contracts on the El Paso pipeline and I've spoken to the regulators out in Arizona and they're extremely concerned. I think they filed an appeal. They are extremely concerned about the impact of that on pricing potentially in Arizona. Can you comment on what is going on related to that decision?

Greg, what we've done is we were also disturbed by the decision. We will be filing a request at the commission and also in court to overturn, actually we're asking for a stay in that decision. And so we can get things worked out. I don't don't believe it will have an impact, Greg, on any -- any impact on the ability to get gas, but it will have some impact on the price of gas. One good part about it, though, is that the order as announced by FIRK took our position, and this was a position APS took, was that they will be not allocate any additional costs to us, in other words, our costs remain the same, for the contract demand piece, which is going to get less contract demand. There was a proposal at one point in time to actually allocate more cost to us.

But basically, you're going to get less of the pies, and you're going to have to -- which means it is going to drive up the amount you have to pay to get gas through the smaller percentage of the capacity that you're able to utilize? Is that a fair summary?

It could.

Thanks a lot.

At this time, there are no further questions. Are there any closing remarks?

This is Becky. I would just like to thank everyone for spending the time with us. I know this has been a long call. These quarterly calls are important to us so we don't limit the Q&A time. And if there is anything that you need, give me a call and we ill be -- or Lisa, and we will be happy to try to answer your questions. Thanks.

This concludes today's Pinnacle West earnings conference call. You may now disconnect.