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Pinnacle West Capital Corp – ‘10-Q’ for 6/30/00

On: Monday, 8/14/00, at 4:36pm ET · For: 6/30/00 · Accession #: 950147-0-1246 · File #: 1-08962

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/14/00  Pinnacle West Capital Corp        10-Q        6/30/00    3:92K                                    Imperial Fin’l … Corp/FA

Quarterly Report — Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report for the Qtr Ended 6/30/00            32    123K 
 2: EX-27.1     Financial Data Schedule                                1      6K 
 3: EX-99.1     Amendment No. 14 to the Anpp Part. Agr.               12     40K

10-Q — Quarterly Report for the Qtr Ended 6/30/00
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Capital Resources and Debt Financing Environmental Matters Exhibits and Reports on Form 8-K Financial Statements Income Taxes Liquidity and Capital Resources Management's Discussion and Analysis of Financial Condition and Results of Operations Market Risks Other Information Pinnacle West Energy Purchased Power Agreements Purported Navajo Environmental Regulation Retail Electric Competition Rules Submission of Matters to A Vote of Security-Holders Water Supply 1996 Regulatory Agreement
1	1st Page - Filing Submission
3	Item 1. Financial Statements
12	Retail Electric Competition Rules
14	1996 Regulatory Agreement
20	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
23	Income Taxes
24	Liquidity and Capital Resources
"	Capital Resources and Debt Financing
25	Pinnacle West Energy
26	Item 3. Market Risks
28	Item 4. Submission of Matters to A Vote of Security-Holders
29	Item 5. Other Information
"	Environmental Matters
"	Purported Navajo Environmental Regulation
"	Water Supply
30	Purchased Power Agreements
31	Item 6. Exhibits and Reports on Form 8-K

10-Q 1st Page of 32 TOC ↑Top Previous Next ↓Bottom Just 1st
 
 FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES          
EXCHANGE ACT OF 1934                                                    

For the quarterly period ended June 30, 2000                            

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES         
EXCHANGE ACT OF 1934                                                    

For the transition period from ______________ to ______________         

Commission file number 1-8962                                           

 PINNACLE WEST CAPITAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)

       Arizona                                              86-0512431
-------------------------------                               ----------------  
(State or other jurisdiction of                               (I.R.S. Employer  
 incorporation or organization)                              Identification No.)

400 E. Van Buren St., P.O. Box 52132, Phoenix, Arizona           85072-2132     
------------------------------------------------------           ----------     
  (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code: (602) 379-2500

----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report) 

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [ ]                               

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.                                

 Number of shares of common stock, no par value,
 outstanding as of August 11, 2000: 84,738,337

10-Q 2nd Page of 32 TOC 1st Previous Next ↓Bottom Just 2nd
Glossary

ACC - Arizona Corporation Commission                                            

ACC Staff - Staff of the Arizona Corporation Commission                         

APS - Arizona Public Service Company, a Pinnacle West subsidiary                

APS Energy Services - APS Energy Services Company, Inc., a Pinnacle West        
subsidiary                                                                      

Company - Pinnacle West Capital Corporation                                     

CPUC - California Public Utilities Commission                                   

DOE - United States Department of Energy                                        

EITF 97-4 - Emerging Issues Task Force Issue No. 97-4, "Deregulation of the     
Pricing of Electricity -- Issues Related to the Application of FASB Statements  
No. 71, Accounting for the Effects of Certain Types of Regulation, and No. 101, 
Regulated Enterprises ___ Accounting for the Discontinuation of Application of  
FASB Statement No. 71"                                                          

El Dorado - El Dorado Investment Company, a Pinnacle West subsidiary            

EPA - United States Environmental Protection Agency                             

FERC - United States Federal Energy Regulatory Commission                       

Four Corners - Four Corners Power Plant                                         

ITC - Investment tax credit                                                     

MW - Megawatts                                                                  

NGS - Navajo Generating Station                                                 

1999 10-K - Pinnacle West Capital Corporation Annual Report on Form 10-K for the
fiscal year ended December 31, 1999                                             

Settlement Agreement - APS' Settlement Agreement approved by the ACC in 1999    

Palo Verde - Palo Verde Nuclear Generating Station                              

Pinnacle West - Pinnacle West Capital Corporation                               

Pinnacle West Energy - Pinnacle West Energy Corporation, a Pinnacle West        
subsidiary                                                                      

Reliant - Reliant Energy Power Generation, Inc.                                 

SCE - Southern California Edison Company                                        

SFAS No. 71 - Statement of Financial Accounting Standards No. 71, "Accounting   
for the Effects of Certain Types of Regulation"                                 

SFAS No. 133 - Statement of Financial Accounting Standards No. 133, "Accounting 
for Derivative Instruments and Hedging Activities"                              

Salt River Project - Salt River Project Agricultural Improvement and Power      
District                                                                        

SunCor - SunCor Development Company, a Pinnacle West subsidiary                 

10-Q 3rd Page of 32 TOC 1st Previous Next ↓Bottom Just 3rd
-2- 

 PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.                                                   

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

                                                  Three Months Ended
                                                  June 30,
                                                   ---------------------------
                                                  2000              1999
                                                   ---------         ---------
Operating Revenues                                                              
 Electric                                          $ 720,174         $ 511,434
 Real estate                                          36,374            32,697
                                                   ---------         ---------
     Total                                           756,548           544,131
                                                   ---------         ---------
Operating Expenses                                                              
 Fuel and purchased power                            289,785           134,756
 Utility operations and maintenance                  107,485           108,264
 Real estate operations                               34,574            29,401
 Depreciation and amortization                        97,941            97,383
 Taxes other than income taxes                        25,610            25,359
                                                   ---------         ---------
     Total                                           555,395           395,163
                                                   ---------         ---------
Operating Income                                     201,153           148,968

Other Income (Expense)                                (6,980)              399
                                                   ---------         ---------

Income Before Interest and Income Taxes               194,173           149,367 
                                                   ---------         ---------
Interest Expense                                                                
 Interest charges                                     43,446            41,105
  Capitalized interest                                 (4,786)           (4,189)
                                                   ---------         ---------
     Total                                            38,660            36,916
                                                   ---------         ---------

Income Before Income Taxes                           155,513           112,451
Income Taxes                                          65,612            43,749
                                                   ---------         ---------

Net Income                                         $  89,901         $  68,702
                                                   =========         =========

Average Common Shares Outstanding - Basic             84,730            84,716

Average Common Shares Outstanding  - Diluted          84,891            85,093

Earnings Per Average Common Share Outstanding                                 
  Net Income - Basic                               $    1.06         $    0.81
  Net Income - Diluted                             $    1.06         $    0.81

Dividends Declared Per Share                       $    0.35         $    0.65

See Notes to Condensed Consolidated Financial Statements.                     

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-3- 

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

                                                  Six Months Ended
                                                  June 30,
                                                  ----------------------------
                                                  2000              1999
                                                  -----------      -----------
Operating Revenues                                                              
 Electric                                         $ 1,166,402      $   925,417
 Real estate                                           78,263           57,230
                                                  -----------      -----------
     Total                                          1,244,665          982,647
                                                  -----------      -----------
Operating Expenses                                                              
 Fuel and purchased power                             415,782          235,101
 Utility operations and maintenance                   218,084          210,206
 Real estate operations                                67,394           51,636
 Depreciation and amortization                        194,979          194,293
 Taxes other than income taxes                         51,002           50,844
                                                  -----------      -----------
     Total                                            947,241          742,080
                                                  -----------      -----------
Operating Income                                       297,424          240,567 
                                                  -----------      -----------
Other Income (Expense)                                                          
  Preferred stock dividend requirements of APS              --           (1,016)
  Net other income and expense                          28,563           (1,938)
                                                  -----------      -----------
      Total                                             28,563           (2,954)
                                                  -----------      -----------

Income Before Interest and Income Taxes                325,987          237,613 
                                                  -----------      -----------
Interest Expense                                                                
 Interest charges                                      84,223           81,874
  Capitalized interest                                  (8,635)          (8,263)
                                                  -----------      -----------
     Total                                             75,588           73,611
                                                  -----------      -----------

Income Before Income Taxes                             250,399          164,002 
Income Taxes                                           106,428           64,610 
                                                  -----------      -----------
Net Income                                         $   143,971      $    99,392 
                                                  ===========      ===========

Average Common Shares Outstanding - Basic               84,729           84,693 

Average Common Shares Outstanding  - Diluted            84,859           85,135 

Earnings Per Average Common Share Outstanding                                   
 Net Income - Basic                               $      1.70      $      1.17
 Net Income - Diluted                             $      1.70      $      1.17

Dividends Declared Per Share                       $      0.70      $     0.975 

See Notes to Condensed Consolidated Financial Statements.                     

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-4- 

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

                                                     Twelve Months Ended
                                                      June 30,
                                                     -------------------------
                                                     2000           1999
                                                     ----------     ----------
Operating Revenues                                                              
 Electric                                            $2,534,169     $2,109,677
 Real estate                                            151,202        118,341
                                                     ----------     ----------
     Total                                            2,685,371      2,228,018
                                                     ----------     ----------
Operating Expenses                                                              
 Fuel and purchased power                               976,790        607,758
 Utility operations and maintenance                     454,655        426,961
 Real estate operations                                 135,274        110,518
 Depreciation and amortization                          386,254        387,557
 Taxes other than income taxes                           96,764        100,971
                                                     ----------     ----------
     Total                                            2,049,737      1,633,765
                                                     ----------     ----------
Operating Income                                         635,634        594,253 
                                                     ----------     ----------
Other Income (Expense)                                                          
  Preferred stock dividend requirements of APS                --         (5,406)
  Net other income and expense                            41,294         (5,880)
                                                     ----------     ----------
      Total                                               41,294        (11,286)
                                                     ----------     ----------
Income From Continuing Operations Before                                        
Interest and Income Taxes                               676,928        582,967
                                                     ----------     ----------
Interest Expense                                                                
 Interest charges                                       164,730        165,656
  Capitalized interest                                   (12,036)       (17,329)
                                                     ----------     ----------
     Total                                              152,694        148,327
                                                     ----------     ----------
Income From Continuing Operations Before                                        
Income Taxes                                            524,234        434,640

Income Taxes                                             209,883        172,439 
                                                     ----------     ----------

Income From Continuing Operations                        314,351        262,201 

Income Tax Benefit From Discontinued Operations           38,000             -- 

Extraordinary Charge - Net of Income Taxes of $94,115   (139,885)            -- 
                                                     ----------     ----------

Net Income                                            $  212,466     $  262,201 
                                                     ==========     ==========

Average Common Shares Outstanding - Basic                 84,735         84,722 

Average Common Shares Outstanding  - Diluted              84,902         85,232 

Earnings Per Average Common Share Outstanding                                   
 Continuing Operations - Basic                       $     3.71     $     3.09
 Net Income - Basic                                  $     2.51     $     3.09
 Continuing Operations - Diluted                     $     3.70     $     3.08
 Net Income - Diluted                                $     2.50     $     3.08

Dividends Declared Per Share                          $     1.05     $     1.30 

See Notes to Condensed Consolidated Financial Statements.                       

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-5- 

 PINNACLE WEST CAPITAL CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
(Thousands of Dollars)

                                                      June 30,      December 31,
                                                    2000            1999
                                                     ----------     ------------
                                     (Unaudited)
Current Assets                                                                  
 Cash and cash equivalents                           $   70,400       $   20,705
 Customer and other receivables--net                    352,354          244,599
 Accrued utility revenues                               112,261           72,919
 Materials and supplies                                  73,038           69,977
 Fossil fuel                                             18,727           21,869
 Deferred income taxes                                    9,663            8,163
 Other current assets                                    78,641           60,562
                                                     ----------       ----------
       Total current assets                             715,084          498,794
                                                     ----------       ----------
Investments and Other Assets                                                    
 Real estate investments--net                           340,682          344,293
 Other assets                                           304,195          267,458
                                                     ----------       ----------
       Total investments and other assets               644,877          611,751
                                                     ----------       ----------
Property, Plant and Equipment                                                   
 Plant in service and held for future use             7,675,652        7,546,314
 Less accumulated depreciation and amortization       3,139,840        3,026,194
                                                     ----------       ----------
       Total                                          4,535,812        4,520,120
 Construction work in progress                          251,602          209,281
 Nuclear fuel, net of amortization                       47,864           49,114
                                                     ----------       ----------
       Net property, plant and equipment              4,835,278        4,778,515
                                                     ----------       ----------
Deferred Debits                                                                 
 Regulatory assets                                      545,622          613,729
 Other deferred debits                                  102,887          105,717
                                                     ----------       ----------
       Total deferred debits                            648,509          719,446
                                                     ----------       ----------

 Total Assets                                        $6,843,748       $6,608,506
                                                     ==========       ==========

See Notes to Condensed Consolidated Financial Statements.                     

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-6- 

 PINNACLE WEST CAPITAL CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND EQUITY
(Thousands of Dollars)

                                                        June 30,    December 31,
                                                      2000          1999
                                                      ----------    ----------
                                         (Unaudited)
Current Liabilities                                                             
 Accounts payable                                     $  242,838    $  186,524
 Accrued taxes                                           197,081        70,510
 Accrued interest                                         33,603        33,253
 Short-term borrowings                                   200,875        38,300
 Current maturities of long-term debt                    114,886       114,798
 Customer deposits                                        26,476        26,098
 Other current liabilities                                   404        26,007
                                                      ----------    ----------
      Total current liabilities                          816,163       495,490
                                                      ----------    ----------

Long-Term Debt Less Current Maturities                  2,075,951     2,206,052 
                                                      ----------    ----------
Deferred Credits and Other                                                      
 Deferred income taxes                                 1,153,827     1,183,855
 Unamortized gain - sale of utility plant                 70,924        73,212
 Other                                                   436,285       444,164
                                                      ----------    ----------
      Total deferred credits and other                 1,661,036     1,701,231
                                                      ----------    ----------

Commitments and contingencies (Notes 6, 7, 9 and 10)                            

Common Stock Equity                                                             
 Common stock, no par value                            1,537,652     1,537,449
 Retained earnings                                       752,946       668,284
                                                      ----------    ----------
      Total common stock equity                        2,290,598     2,205,733
                                                      ----------    ----------

Total Liabilities and Equity                           $6,843,748    $6,608,506 
                                                      ==========    ==========

See Notes to Condensed Consolidated Financial Statements.                     

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-7- 

 PINNACLE WEST CAPITAL CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(THOUSANDS OF DOLLARS)

                                                      Six Months Ended
                                                      June 30,
                                                      ------------------------
                                                      2000            1999
                                                      ---------      ---------
CASH FLOWS FROM OPERATING ACTIVITIES                                            
Net Income                                            $ 143,971      $  99,392
Items not requiring cash                                                    
   Depreciation and amortization                        194,979        194,293
   Nuclear fuel amortization                             15,124         15,673
    Deferred income taxes--net                            (8,518)       (21,477)
    Other--net                                            (3,623)        (6,577)
Changes in current assets and liabilities                                   
   Customer and other receivables--net                 (107,755)        48,175
    Accrued utility revenues                             (39,342)       (30,306)
    Materials, supplies and fossil fuel                       81         (5,653)
    Other current assets                                 (18,079)        (8,329)
    Accounts payable                                      60,918        (25,465)
   Accrued taxes                                        126,571         95,675
   Accrued interest                                         350          1,106
    Other current liabilities                            (25,178)        (5,307)
 Change in El Dorado partnership investment             (26,794)            --
  Decrease (increase) in land held                         4,314         (4,642)
  Other--net                                              (6,035)       (16,382)
                                                      ---------      ---------
Net Cash Flow Provided By Operating Activities           310,984        330,176 
                                                      ---------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES                                            
  Capital expenditures                                  (223,361)      (153,730)
  Capitalized interest                                    (8,635)        (8,263)
 Other--net                                              (1,541)         1,282
                                                      ---------      ---------
Net Cash Flow Used For Investing Activities             (233,537)      (160,711)
                                                      ---------      ---------
CASH FLOWS FROM FINANCING ACTIVITIES                                            
 Issuance of long-term debt                             139,000        193,691
 Short-term borrowings--net                             162,575         45,120
  Dividends paid on common stock                         (59,307)       (55,101)
  Repayment of long-term debt                           (270,223)      (235,755)
  Redemption of preferred stock                               --        (96,499)
  Other--net                                                 203         (8,948)
                                                      ---------      ---------
Net Cash Flow Used For Financing Activities              (27,752)      (157,492)
                                                      ---------      ---------
Net Cash Flow                                             49,695         11,973 
Cash and Cash Equivalents at Beginning of Period          20,705         20,538 
                                                      ---------      ---------
Cash and Cash Equivalents at End of Period             $  70,400      $  32,511 
                                                      =========      =========
Supplemental Disclosure of Cash Flow Information:                               
Cash paid during the period for:                                                
Interest, net of amounts capitalized                   $  72,475      $  68,341 
Income taxes                                           $   6,361      $     940 

See Notes to Condensed Consolidated Financial Statements.                       

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-8- 

 PINNACLE WEST CAPITAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The condensed consolidated financial statements include the accounts of      
Pinnacle West and its subsidiaries: APS, Pinnacle West Energy, APS Energy       
Services, SunCor, and El Dorado . All significant intercompany balances have    
been eliminated. We have reclassified certain prior year amounts to conform to  
the current year presentation.                                                  

2. Our unaudited condensed consolidated financial statements reflect all        
adjustments which we believe are necessary for the fair presentation of our     
financial position and results of operations for the periods presented. These   
adjustments are of a normal recurring nature with the exception of the          
extraordinary charge and the tax benefit from discontinued operations. We       
suggest that these Condensed Consolidated Financial Statements and Notes to     
Condensed Consolidated Financial Statements be read along with the Consolidated 
Financial Statements and Notes to Consolidated Financial Statements included in 
our 1999 10-K.                                                                  

3. Weather conditions and wholesale power marketing and trading activities can  
have significant impacts on our results for interim periods. El Dorado's        
earnings are subject to stock market volatility (see Note 12). For these and    
other reasons, results for interim periods do not necessarily represent results 
to be expected for the year.                                                    

4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for   
changes in capitalization for the six months ended June 30, 2000.               

5. Regulatory Accounting                                                        

For regulated operations, APS prepares its financial statements in accordance   
with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for 
the Effects of Certain Types of Regulation." SFAS No. 71 requires a cost-based, 
rate-regulated enterprise to reflect the impact of regulatory decisions in its  
financial statements.                                                           

During 1997, the Emerging Issues Task Force (EITF) of the Financial Accounting  
Standards Board (FASB) issued EITF 97-4. EITF 97-4 requires that SFAS No. 71 be 
discontinued no later than when legislation is passed or a rate order is issued 
that contains sufficient detail to determine its effect on the portion of the   
business being deregulated, which could result in write-downs or write-offs of  
physical and/or regulatory assets. Additionally, the EITF determined that       
regulatory assets should not be written off if they are to be recovered from a  
portion of the entity which continues to apply SFAS No. 71.                     

The Settlement Agreement was approved by the ACC in September 1999 (see Note 6  
for a discussion of the agreement). Consequently, APS has discontinued the      
application of SFAS No. 71 for its generation operations. This means that the   
generation assets were tested for impairment and the portion of regulatory      
assets deemed to be unrecoverable through ongoing regulated cash flows was      
eliminated. APS determined that the generation assets were not impaired. A      
regulatory disallowance removed $234 million pretax ($183 million net present   
value) from ongoing regulatory cash flows and was recorded as a net             

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-9- 

reduction of regulatory assets. This reduction ($140 million after income taxes)
was reported as an extraordinary charge on the income statement during the third
quarter of 1999. Prior to the Settlement Agreement, under the 1996 regulatory   
agreement (see Note 6), the ACC accelerated the amortization of substantially   
all of APS' regulatory assets to an eight-year period ending June 30, 2004.     

The regulatory assets to be recovered under the 1999 Settlement Agreement are   
now being amortized as follows (millions of dollars):                           

                                            1/1 - 6/30
    1999      2000      2001      2002      2003      2004     Total
    ----      ----      ----      ----      ----      ----     -----
   $164      $158      $145      $115      $86       $18      $686

The majority of APS' regulatory assets relate to deferred income taxes and rate 
synchronization cost deferrals.                                                 

The condensed consolidated balance sheets include the amounts listed below for  
generation assets not subject to SFAS No. 71 (thousands of dollars):            

                                                   June 30,       December 31,
                                                2000            1999
                                                 -----------     -----------
Electric plant in service & held for future use    $ 3,761,855     $ 3,770,234  
Accumulated depreciation and amortization           (1,678,752)     (1,641,855) 
Construction work in progress                          140,037          87,819  
Nuclear fuel, net of amortization                       47,864          49,114  

6. Regulatory Matters -- Electric Industry Restructuring                        

STATE                                                                           

SETTLEMENT AGREEMENT. On May 14, 1999, APS entered into a comprehensive         
Settlement Agreement with various parties, including representatives of major   
consumer groups, related to the implementation of retail electric competition.  
On September 23, 1999, the ACC voted to approve the Settlement Agreement, with  
some modifications. On December 13, 1999, two parties filed lawsuits challenging
the ACC's approval of the Settlement Agreement. One of the parties questioned   
the authority of the ACC to approve the Settlement Agreement and both parties   
challenged several specific provisions of the Settlement Agreement. A decision  
on the appeals to the Settlement Agreement is not expected until later this year
or next year.                                                                   

The following are the major provisions of the Settlement Agreement, as approved:

*    APS will reduce rates for standard offer service for customers with loads  
less than 3 megawatts in a series of annual retail electric price     
reductions of 1.5% beginning                                          

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-10-

     July 1, 1999 through July 1, 2003, for a total of 7.5%. The first reduction
    of approximately $24 million ($14 million after income taxes) included the
  July 1, 1999 retail price decrease of approximately $11 million annually
   ($7 million after income taxes) related to the 1996 regulatory agreement.
See "1996 Regulatory Agreement" below. Based on the price reduction   
   authorized in the Settlement Agreement, there was a retail price decrease
    of approximately $28 million ($17 million after taxes), or 1.5%, effective
   July 1, 2000. For customers having loads 3 megawatts or greater, standard
offer rates will be reduced in varying annual increments that total 5%
through 2002.                                                         

*    Unbundled rates being charged by APS for competitive direct access service 
    (for example, distribution services) became effective upon approval of the
     Settlement Agreement, retroactive to July 1, 1999, and also will be subject
  to annual reductions beginning January 1, 2000, that vary by rate class,
through January 1, 2004.                                              

*    There will be a moratorium on retail price changes for standard offer and  
     unbundled competitive direct access services until July 1, 2004, except for
the price reductions described above and certain other limited        
  circumstances. Neither the ACC nor APS will be prevented from seeking or
   authorizing rate changes prior to July 1, 2004 in the event of conditions
or circumstances that constitute an emergency, such as an inability to
  finance on reasonable terms, or material changes in APS' cost of service
   for ACC-regulated services resulting from federal, tribal, state or local
laws, regulatory requirements, judicial decisions, actions or orders. 

*    APS will be permitted to defer for later recovery prudent and reasonable   
     costs of complying with the ACC electric competition rules, system benefits
costs in excess of the levels included in current rates, and costs    
associated with APS' "provider of last resort" and standard offer     
     obligations for service after July 1, 2004. These costs are to be recovered
through an adjustment clause or clauses commencing on July 1, 2004.   

*    APS' distribution system opened for retail access effective September 24,  
   1999. Customers will be eligible for retail access in accordance with the
phase-in adopted by the ACC under the electric competition rules (see 
"Retail Electric Competition Rules" below), with an additional 140    
megawatts being made available to eligible non-residential customers. 
Unless subject to judicial or regulatory restraint, APS will open its 
    distribution system to retail access for all customers on January 1, 2001.

*    Prior to the Settlement Agreement, APS was recovering substantially all of 
     its regulatory assets through July 1, 2004, pursuant to the 1996 regulatory
agreement. In addition, the Settlement Agreement states that APS has  
demonstrated that its allowable stranded costs, after mitigation and  
exclusive of regulatory assets, are at least $533 million net present 
     value. APS will not be allowed to recover $183 million net present value of
     the above amounts. The Settlement Agreement provides that APS will have the
     opportunity to recover $350 million net present value through a competitive
 transition charge (CTC) that will remain in effect through December 31,
2004, at which time it will terminate. Any over/under-recovery will be

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     credited/debited against the costs subject to recovery under the adjustment
clause described above.                                               

*    APS will form a separate corporate affiliate or affiliates and transfer to 
  that affiliate(s) its generating assets and competitive services at book
    value as of the date of transfer, which transfer shall take place no later
 than December 31, 2002. APS will be allowed to defer and later collect,
    beginning July 1, 2004, sixty-seven percent of its costs to accomplish the
required transfer of generation assets to an affiliate.               

*    When the Settlement Agreement approved by the ACC is no longer subject to  
 judicial review, APS will move to dismiss all of its litigation pending
     against the ACC as of the date it entered into the Settlement Agreement. To
     protect APS' rights, it has several lawsuits pending on ACC orders relating
to stranded cost recovery and the adoption and amendment of the ACC's 
 electric competition rules, which would be voluntarily dismissed at the
appropriate time under this provision.                                

As discussed in Note 5 above, APS has discontinued the application of SFAS No.  
71 for its generation operations.                                               

RETAIL ELECTRIC COMPETITION RULES. On September 21, 1999, the ACC voted to      
approve the rules that provide a framework for the introduction of retail       
electric competition in Arizona (Rules). If any of the Rules conflict with the  
Settlement Agreement, the terms of the Settlement Agreement govern. On December 
8, 1999, APS filed a lawsuit to protect its legal rights regarding the Rules.   
This lawsuit is pending, along with several other lawsuits on ACC orders        
relating to stranded cost recovery and the adoption or amendment of the Rules,  
but two related cases filed by other utilities have been partially decided in a 
manner adverse to those utilities' positions.                                   

On July 12, 2000, a Maricopa County Superior Court judge issued a preliminary   
ruling in favor of the ACC and denied substantive challenges to the Rules that  
had been made by the electric cooperatives. However, he concluded that some of  
the Rules were invalid because of procedural deficiencies. Specifically, the    
judge concluded that several non-ratemaking Rules were required to be presented 
to the Arizona Attorney General for certification. Additionally, the judge      
determined that the Arizona Constitution requires the ACC to make findings      
regarding the fair value of property in Arizona of competitive electric service 
providers. We do not believe that the ruling affects the Settlement Agreement   
with the ACC. The Settlement Agreement was not at issue in the consolidated     
cases before the judge. Further, the ACC made findings related to fair value of 
APS' property in the order approving the APS Settlement Agreement.              

The ruling does not immediately affect the Rules. APS expects that, in the next 
few weeks, the court will consider proposed forms of judgment which will        
establish the specific impact of the ruling. Although the ACC has not yet       
indicated what steps it intends to take after a judgment is issued, the ACC     
could appeal the ruling to the Court of Appeals or could elect to take          
corrective action to correct the procedural deficiencies identified in the      
judge's ruling. The cooperatives may also appeal the ruling. There is authority 
indicating that if the order is appealed by the ACC, it will be automatically   
stayed pending further judicial review. Certain                                 

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other appeals of the Rules are still pending in the Maricopa County Superior    
Court. We believe that the court may rule on the remaining appeals later this   
year or next year.                                                              

On January 14, 2000, a special action was filed requesting the Arizona Supreme  
Court to enjoin implementation of the Rules and decide whether the ACC can allow
the competitive marketplace, rather than the ACC, to set just and reasonable    
rates under the Arizona Constitution. The issue of competitively set rates has  
been decided by lower Arizona courts in favor of the ACC in four separate       
lawsuits, two of which relate to telecommunications companies. The Supreme Court
denied to hear the case as a special action on March 17, 2000. The lower court  
litigation will continue.                                                       

The Rules approved by the ACC include the following major provisions:           

*    They apply to virtually all Arizona electric utilities regulated by the    
ACC, including APS.                                                   

*    The Rules require each affected utility, including APS, to make available  
at least 20% of its 1995 system retail peak demand for competitive    
 generation supply beginning when the ACC makes a final decision on each
utility's stranded costs and unbundled rates (Final Decision Date) or 
    January 1, 2001, whichever is earlier, and 100% beginning January 1, 2001.
     Under the Settlement Agreement, APS will provide retail access to customers
representing the minimum 20% required by the ACC and an additional 140
megawatts of non-residential load in 1999, and to all customers as of 
January 1, 2001, or such other dates as approved by the ACC.          

*    Subject to the 20% requirement, all utility customers with single premise  
    loads of one megawatt or greater will be eligible for competitive electric
services on the Final Decision Date, which for APS' customers was the 
    approval of the Settlement Agreement. Customers may also aggregate smaller
loads to meet this one megawatt requirement.                          

*    When effective, residential customers will be phased in at 1.25% per       
quarter calculated beginning on January 1, 1999, subject to the 20%   
requirement above.                                                    

*    Electric service providers that get Certificates of Convenience and        
Necessity (CC&Ns) from the ACC can supply only competitive services,  
including electric generation, but not electric transmission and      
distribution.                                                         

*    Affected utilities must file ACC tariffs that unbundle rates for           
non-competitive services.                                             

*    The ACC shall allow a reasonable opportunity for recovery of unmitigated   
stranded costs.                                                       

*    Absent an ACC waiver, prior to January 1, 2001, each affected utility      
(except certain electric cooperatives) must transfer all competitive  
generation assets and services either to an unaffiliated party or to a
separate corporate affiliate. Under the                               

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Settlement Agreement, APS received a waiver to allow transfer of its  
competitive generation assets and services to affiliates no later than
December 31, 2002.                                                    

1996 REGULATORY AGREEMENT. In April 1996, the ACC approved a regulatory         
agreement between the ACC Staff and APS. Based on the price reduction formula   
authorized in the agreement, the ACC approved retail price decreases            
(approximate) as follows (millions of dollars):                                 

Annual Electric            Percentage                               
Revenue Decrease             Decrease              Effective Date     
----------------             --------              --------------     
$49                      3.4%                July 1, 1996 
$18                      1.2%                July 1, 1997 
$17                      1.1%                July 1, 1998 
   $11                      0.7%                July 1, 1999 (a)

(a)  Included in the first rate reduction under the Settlement Agreement (see   
above).                                                               

The regulatory agreement also required the parent company to infuse $200 million
of common equity into APS in annual payments of $50 million from 1996 through   
1999. All of these equity infusions were made by December 31, 1999.             

LEGISLATION. In May 1998, a law was enacted to facilitate implementation of     
retail electric competition in Arizona. The law includes the following major    
provisions:                                                                     

*    Arizona's largest government-operated electric utility (Salt River Project)
   and, at their option, smaller municipal electric systems must (i) make at
  least 20% of their 1995 retail peak demand available to electric service
     providers by December 31, 1998 and for all retail customers by December 31,
    2000; (ii) decrease rates by at least 10% over a ten-year period beginning
as early as January 1, 1991; (iii) implement procedures and public    
processes comparable to those already applicable to public service    
corporations for establishing the terms, conditions, and pricing of   
electric services as well as certain other decisions affecting retail 
electric competition;                                                 

*    describes the factors which form the basis of consideration by Salt River  
Project in determining stranded costs; and                            

*    metering and meter reading services must be provided on a competitive basis
     during the first two years of competition only for customers having demands
     in excess of one megawatt (and that are eligible for competitive generation
    services), and thereafter for all customers receiving competitive electric
generation.                                                           

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GENERAL                                                                         

We cannot accurately predict the impact of full retail competition on our       
financial position, cash flows, or results of operations. As competition in the 
electric industry continues to evolve, we will continue to evaluate strategies  
and alternatives that will position the Company and our subsidiaries to compete 
in the new regulatory environment.                                              

FEDERAL                                                                         

The Energy Policy Act of 1992 and recent rulemakings by FERC have promoted      
increased competition in the wholesale electric power markets. APS does not     
expect these rules to have a material impact on its financial statements.       

Several electric utility industry restructuring bills have been introduced      
during the current congressional session. Several of these bills are written to 
allow consumers to choose their electricity suppliers beginning in 2000 and     
beyond. These bills, other bills that are expected to be introduced, and ongoing
discussions at the federal level suggest a wide range of opinion that will need 
to be narrowed before any comprehensive restructuring of the electric utility   
industry can occur.                                                             

7. Nuclear Insurance                                                            

The Palo Verde participants have insurance for public liability payments        
resulting from nuclear energy hazards to the full limit of liability under      
federal law. This potential liability is covered by primary liability insurance 
provided by commercial insurance carriers in the amount of $200 million and the 
balance by an industry-wide retrospective assessment program. If losses at any  
nuclear power plant covered by the programs exceed the accumulated funds, APS   
could be assessed retrospective premium adjustments. The maximum assessment per 
reactor under the program for each nuclear incident is approximately $88        
million, subject to an annual limit of $10 million per incident. Based upon APS'
29.1% interest in the three Palo Verde units, APS' maximum potential assessment 
per incident is approximately $77 million, with an annual payment limitation of 
approximately $9 million.                                                       

The Palo Verde participants maintain "all risk" (including nuclear hazards)     
insurance for property damage to, and decontamination of, property at Palo Verde
in the aggregate amount of $2.75 billion, a substantial portion of which must   
first be applied to stabilization and decontamination. APS has also secured     
insurance against portions of any increased cost of generation or purchased     
power and business interruption resulting from a sudden and unforeseen outage of
any of the three units. The insurance coverage discussed in this and the        
previous paragraph is subject to certain policy conditions and exclusions.      

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8. Business Segments                                                            

We have two principal business segments (determined by products, services and   
regulatory environment) which consist of the transmission and distribution of   
electricity and wholesale power marketing and trading activities (delivery      
business segment) and the generation of electricity (generation business        
segment). We plan to move our wholesale power marketing and trading activities  
from APS to the parent company by the end of 2000. The other amounts include    
activity relating to the parent company and other subsidiaries including APS    
Energy Services, SunCor and El Dorado. Eliminations primarily relate to         
intersegment sales of electricity. Segment information for the three, six and   
twelve months ended June 30, 2000 and 1999 is as follows (millions of dollars): 

                                                        [Enlarge/Download Table]

                                    3 Months Ended     6 Months Ended      12 Months Ended    
                                       June 30,            June 30,            June 30,       
                                    --------------     ---------------     ----------------   
                                    2000      1999     2000       1999     2000        1999   
                                    ----      ----     ----       ----     ----        ----   
                                                                                              
Operating Revenues:                                                                           
Delivery                            $ 719     $ 511   $ 1,165     $ 925   $ 2,533     $ 2,110 
Generation                            249       220       428       396       886         877 
Other                                  38        33        80        58       152         118 
Eliminations                         (249)     (220)     (428)     (396)     (886)       (877)
                                    -----     -----   -------     -----   -------     ------- 
     Total                          $ 757     $ 544   $ 1,245     $ 983   $ 2,685     $ 2,228 
                                    =====     =====   =======     =====   =======     ======= 

Income from Continuing Operations:                                                            
Delivery                            $  55     $  34   $    80     $  55   $   172     $   144 
Generation                             40        36        48        47       121         125 
Other                                  (5)       (1)       16        (3)       21          (7)
                                    -----     -----   -------     -----   -------     ------- 
     Total                          $  90     $  69   $   144     $  99   $   314     $   262 
                                    =====     =====   =======     =====   =======     ======= 

                                                          As of June 30,   As of December 31, 
                                                               2000              1999         
                                                               ----              ----         
Assets:                                                                                       
Delivery                                                      $3,938            $3,796        
Generation                                                     2,381             2,342        
Other                                                            525               471        
                                                              ------            ------        
     Total                                                    $6,844            $6,609        
                                                              ======            ======        

9. Accounting Matters                                                           

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,     
"Accounting for Derivative Instruments and Hedging Activities," as amended,     
which is effective for us in 2001. SFAS No. 133 requires that entities recognize
all derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. The standard also provides specific guidance   
for accounting for derivatives designated as hedging instruments. We are        
currently evaluating what impact this standard will have on our financial       
statements.                                                                     

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10. Generation Expansion                                                        

Pinnacle West Energy has announced plans to build and acquire up to 4,000 MW of 
generating capacity from 2001-2006 at an estimated cost of about $2 billion,    
assuming all of the announced plants are built or acquired.                     

Pinnacle West Energy is also considering additional expansion over the next     
several years, which may result in additional expenditures. Pinnacle West       
Energy's expenditures are expected to be funded through debt issued directly by 
Pinnacle West Energy, as well as capital infusions from the parent company's    
internally generated cash and debt proceeds.                                    

Pinnacle West Energy is currently planning a 650-megawatt expansion of the West 
Phoenix Power Plant and the construction of a natural gas-fired electric        
generating station of up to 2,120 megawatts near Palo Verde, called Redhawk (see
discussion in the following paragraph). Construction at West Phoenix began in   
July 2000, with commercial operation of the first unit expected in the summer of
2001. Pinnacle West Energy also expects that construction will begin on the     
first two units of Redhawk near the end of 2000, with commercial operation      
scheduled for the summer of 2002.                                               

Pinnacle West Energy and Reliant have terminated discussions on joint           
development of the first two Redhawk units and three units in Nevada. Pinnacle  
West Energy currently plans to keep the first two units (1,060 megawatts) of the
Redhawk project on schedule.                                                    

Projected capital expenditures for the above expansion plans on the current     
schedule are estimated to be $277 million in 2000, $392 million in 2001, and    
$141 million in 2002.                                                           

On April 27, 2000, Pinnacle West Energy entered into two separate agreements    
with SCE to purchase SCE's 15.8% ownership interest in Palo Verde and its 48%   
ownership interest in Units 4 and 5 of the Four Corners Power Plant (Four       
Corners). The purchase price is $550 million in cash to be paid at closing,     
subject to certain adjustments. The interests to be acquired represent 1,310 MW 
of generating capacity (600 MW associated with SCE's Palo Verde interest, and   
710 MW associated with SCE's Four Corners interest). The transactions are       
expected to close in mid-2001, subject to the approval of various governmental  
authorities, including the CPUC, the FERC, the Nuclear Regulatory Commission,   
the Internal Revenue Service, and the Navajo Nation.                            

The agreements between Pinnacle West Energy and SCE include the following       
additional terms:                                                               

*    Prior to and up to 90 days following SCE's filing with the CPUC seeking    
approval of the transactions, which was made on May 15, 2000, SCE was 
    allowed to solicit offers for, or indications of interest in, (a) its Four
Corners interest or (b) its Four Corners interest and its Palo Verde  
   interest. SCE's sale of its interest in Four Corners is also subject to a
    right of first refusal on the part of the other Four Corners participants,
 including APS. Pinnacle West Energy had the right to match any offer or
indication of interest that SCE                                       

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    received during this period. This period has expired without Pinnacle West
Energy matching an indication of interest.                            

*    The Agreements permit SCE, for a period of up to 120 days (until early     
     December), to engage in further negotiations and discussions with any party
     who submitted an indication of interest. Subject to CPUC approval, Pinnacle
  West Energy retains the right under the Agreements to match the terms of
any binding agreement that SCE elects to enter into.                  

*    Pinnacle West Energy is not obligated to purchase SCE's Four Corners       
 interest unless SCE also sells its Palo Verde interest to Pinnacle West
  Energy. SCE is not obligated to sell its Palo Verde interest to Pinnacle
West Energy unless Pinnacle West Energy (or some other third party)   
purchases SCE's Four Corners interest.                                

*    SCE will transfer the assets of its Palo Verde decommissioning fund to     
     Pinnacle West Energy, and Pinnacle West Energy will assume SCE's Palo Verde
decommissioning obligations.                                          

*    Pinnacle West Energy will assume SCE's obligations and liabilities         
    associated with ownership of its interests in Palo Verde and Four Corners,
subject to specified exceptions.                                      

*    We guaranteed Pinnacle West Energy's obligations under each of the         
  agreements, including Pinnacle West Energy's purchase price obligations.

The Utility Reform Network, which represents the interests of SCE's residential 
and small commercial customers, has filed a protest with the CPUC recommending  
that the CPUC reject the sale and require SCE to retain the generating          
facilities. The California Office of Ratepayer Advocates has also filed         
objections regarding various aspects of the proposed transactions. There can be 
no assurance that other protests will not be filed with the CPUC.               

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11. Income Tax Benefit                                                          

In September 1999, we recorded a tax benefit of $38 million, or $0.45 per basic 
or diluted share, which stemmed from the resolution of income tax matters       
related to a former subsidiary, MeraBank, A Federal Savings Bank. This amount is
reflected as a tax benefit from discontinued operations in the income statement.

12. El Dorado Partnership Investment Income                                     

Net other income consists primarily of El Dorado's share in the earnings of a   
venture capital partnership. The partnership adjusts the value of its investment
at the end of each fiscal quarter. The value of El Dorado's investment in the   
partnership is determined by various factors beyond our control, including      
equity market conditions. Most of the partnership's investments are in          
technology-related companies whose share prices are highly volatile.            

Prior to June 2000, we recorded our share of the earnings from the partnership, 
as the partnership adjusted the value of its investment, on a one-quarter lag.  
This was done due to time constraints in obtaining and analyzing such results   
for inclusion in our consolidated financial statements on a current basis.      

During the second quarter of 2000, we requested a distribution of our share of  
the investments held by the partnership. There is some disagreement with the    
general partner regarding the distribution of those shares, but we believe we   
have legal authority to request and receive our share of the investments. We are
pursuing that distribution and accordingly have adjusted our investment to      
reflect the current market value. In the second quarter of 2000, we recognized  
earnings net of tax of $28 million on the one-quarter lag basis offset by a $31 
million decline net of tax in the value of our investment for the fiscal quarter
ended June 30, 2000 for a total net loss of $3 million for the quarter.         

Upon receipt, we will account for the securities as available for sale with     
changes in value recorded in other comprehensive income. Gains and losses from  
the ultimate sale of such securities will be reflected in our net earnings. The 
book value of El Dorado's investment in the partnership at June 30, 2000 was    
approximately $38 million.                                                      

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 PINNACLE WEST CAPITAL CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS.                                                  

In this section, we explain our results of operations, general financial        
condition, and outlook for Pinnacle West and our subsidiaries: APS, Pinnacle    
West Energy, APS Energy Services, SunCor, and El Dorado including:              

*    the changes in our earnings for the periods presented            
*    the factors impacting our business, including competition        
*    the effects of regulatory decisions on our results and outlook   
*    our capital needs and resources and                              
*    our management of market risks.                                  

APS, our major subsidiary and Arizona's largest electric utility, provides      
retail and wholesale electric service to the entire state with the exception of 
Tucson and about one-half of the Phoenix area. APS also generates, sells, and   
delivers electricity to wholesale customers in the western United States. SunCor
is a developer of residential, commercial, and industrial real estate projects  
in Arizona, New Mexico, and Utah. El Dorado is primarily a venture capital firm.
APS Energy Services was formed in 1998 and sells energy and energy-related      
products and services in competitive retail markets in the western United       
States. Pinnacle West Energy, which was formed in 1999, is the subsidiary       
through which we intend to conduct our unregulated generation operations.       

The following table summarizes net income for the three-month, six-month and    
twelve-month periods ended June 30, 2000 and the comparable prior-year periods  
for Pinnacle West and each of its subsidiaries:                                 

                                                        [Enlarge/Download Table]

                                      3 Months Ended     6 Months Ended      12 Months Ended   
                                          June 30,          June 30,             June 30,      
                                      ---------------   -----------------   -----------------  
(Millions of Dollars)                 2000       1999   2000        1999    2000       1999 (a)
                                      ----       ----   ----        ----    ----       --------
                                                                                               
APS                                   $ 96       $ 70   $ 129       $ 102   $ 294       $ 269  
Pinnacle West Energy                    (1)        --      (1)         --      (1)         --  
APS Energy Services                     (2)        (2)     (4)         (3)    (10)         (3) 
SunCor                                   1          3       6           4       8           6  
El Dorado                               (3)        --      16          --      27          --  
Parent Company                          (1)        (2)     (2)         (4)     (4)        (10) 
                                      ----       ----   -----       -----   -----       -----  
Income From Continuing Operations       90         69     144          99     314         262  
Income Tax Benefit From Discontinued                                                           
 Operations                             --         --      --          --      38          --  

Extraordinary Charge - Net of Income                                                           
 Taxes of $94                           --         --      --          --    (140)         --  
                                      ----       ----   -----       -----   -----       -----  
Net Income                            $ 90       $ 69   $ 144       $  99   $ 212       $ 262  
                                      ====       ====   =====       =====   =====       =====  

(a)  SunCor's 1999 earnings have been restated here to exclude a $37 million    
deferred tax benefit. In accordance with our intercompany tax sharing 
agreement, the offset resides with the parent company. There is no    
consolidated earnings effect as these tax benefits had already been   
reflected on a consolidated basis.                                    

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We suggest this section be read along with the 1999 10-K. Throughout this       
Management's Discussion and Analysis of Financial Condition and Results of      
Operations, we refer to specific "Notes" in the Notes to Condensed Consolidated 
Financial Statements. These Notes add further details to the discussion.        

OPERATING RESULTS                                                               

  OPERATING RESULTS - THREE-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED WITH
THREE-MONTH PERIOD ENDED JUNE 30, 1999                                

Consolidated net income for the three months ended June 30, 2000 was $90 million
compared with $69 million for the same period in the prior year. Consolidated   
net income increased for the three-month period primarily because of an increase
in the profitability of wholesale power marketing and trading activities, and   
increases in the number of customers and in the average amount of electricity   
used by customers. These positive factors more than offset decreases due to the 
effects of increased fuel and purchased power costs, the completion of the      
amortization of ITCs in 1999, an electricity price reduction, and a decrease in 
El Dorado's earnings. See Note 6 for information on the price reduction. See    
"Income Taxes" below for a discussion of the ITC amortization.                  

Electric operating revenues increased $209 million because of:                  

*    increased power marketing and trading revenues ($150 million)    
*    increases in the number of customers and the average amount of   
electricity used by customers ($44 million)                 
*    warmer weather impacts ($18 million) and                         
*    miscellaneous factors ($4 million).                              

As mentioned above, these positive factors were partially offset by the effect  
of a reduction in retail electricity prices ($7 million).                       

The increase in power marketing and trading revenues resulted from higher prices
and increased activity in the western U.S. wholesale power markets. The revenues
were accompanied by an increase in purchased power and fuel expenses of $105    
million.                                                                        

Fuel and purchased power expenses were also higher because of higher retail     
sales volumes and increased fuel prices.                                        

Other income (expense) decreased $7 million primarily because of a quarterly    
adjustment of the value of El Dorado's investment in a technology-related       
venture capital partnership. See Note 12.                                       

OPERATING RESULTS - SIX-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED WITH
SIX-MONTH PERIOD ENDED JUNE 30, 1999                                  

Consolidated net income for the six months ended June 30, 2000 was $144 million 
compared with $99 million for the same period in the prior year. The increase   
primarily relates to an increase in El Dorado's earnings, an increase in the    
profitability of wholesale                                                      

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power marketing and trading activities, and increases in the number of customers
and in the average amount of electricity used by customers. These positive      
factors more than offset decreases due to the effects of increased fuel and     
purchased power costs, the completion of the amortization of ITCs in 1999, an   
electricity price reduction, and higher utility operations and maintenance      
expense. See Note 6 for information on the price reduction. See "Income Taxes"  
below for a discussion of the ITC amortization.                                 

Electric operating revenues increased $241 million because of:                  

*    increased power marketing and trading revenues ($173 million)    
*    increases in the number of customers and the average amount of   
electricity used by customers ($55 million)                 
*    warmer weather impacts ($19 million) and                         
*    miscellaneous factors ($7 million).                              

These positive factors were partially offset by the effect of a reduction in    
retail electricity prices ($13 million).                                        

The increase in power marketing and trading revenues resulted from higher prices
and increased activity in the western U.S. wholesale power markets. The revenues
were accompanied by an increase in purchased power and fuel expenses of $129    
million.                                                                        

Fuel and purchased power expenses were also higher because of higher retail     
sales volumes and increased fuel prices.                                        

Utility operations and maintenance expenses increased primarily because of      
higher costs related to customer growth.                                        

Net other income increased $31 million primarily because of quarterly           
adjustments of the value of El Dorado's investment in a technology-related      
venture capital partnership. See Note 12.                                       

   OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED WITH
TWELVE-MONTH PERIOD ENDED JUNE 30, 1999                               

Consolidated net income for the twelve months ended June 30, 2000 was $212      
million compared with $262 million for the same period in the prior year. The   
decrease primarily relates to an extraordinary charge recorded in the third     
quarter of 1999, partially offset by higher income from continuing operations,  
as well as an income tax benefit from discontinued operations also recorded in  
the third quarter of 1999.                                                      

The extraordinary charge related to a regulatory disallowance that resulted from
APS' comprehensive Settlement Agreement that was approved by the ACC in         
September 1999. See Notes 5 and 6 for additional information about the          
regulatory disallowance and the Settlement Agreement.                           

The income tax benefit from discontinued operations resulted from the resolution
of income tax matters related to a former subsidiary, MeraBank. See Note 11.    

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Income from continuing operations increased $52 million over the comparable     
prior period primarily because of an increase in El Dorado's earnings, increases
in the number of customers and in the average amount of electricity used by     
customers, and an increase in the profitability of wholesale power marketing and
trading activities. These positive factors more than offset decreases due to a  
reduction in retail electricity prices, higher utility operations and           
maintenance expense, and the completion of the amortization of ITCs in 1999. See
Note 6 for information on the price reduction. See "Income Taxes" below for a   
discussion of the ITC amortization.                                             

Electric operating revenues increased $424 million because of:                  

*    increased power marketing and trading revenues ($338 million)    
*    increases in the number of customers and the average amount of   
electricity used by customers ($94 million) and             
*    miscellaneous factors ($19 million).                             

These positive factors were partially offset by the effect of a reduction in    
retail prices ($27 million).                                                    

The increase in power marketing and trading revenues resulted primarily from    
increased activity in western U.S. wholesale power markets and higher prices.   
The revenues were accompanied by increases in purchased power and fuel expenses 
of $306 million.                                                                

Fuel and purchased power expenses were also higher because of higher retail     
sales volumes and increased fuel prices.                                        

Utility operations and maintenance expenses increased primarily because of $16  
million of non-recurring items recorded in the current twelve-month period,     
including a provision for certain environmental costs. Other increases primarily
related to customer growth, power marketing costs, and technology related costs.

Net other income increased $47 million primarily because of quarterly           
adjustments of the value of El Dorado's investment in a technology-related      
venture capital partnership. See Note 12.                                       

INCOME TAXES                                                                    

As part of a 1994 rate settlement with the ACC, APS accelerated amortization of 
substantially all deferred ITCs over a five-year period that ended on December  
31, 1999. The ITC amortization decreased annual income tax expense by           
approximately $24 million. Beginning in 2000, no further benefits from these    
deferred ITCs will be reflected in income tax expense.                          

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LIQUIDITY AND CAPITAL RESOURCES                                                 

CAPITAL EXPENDITURE REQUIREMENTS                                      

The following table summarizes the actual capital expenditures for the six-month
period ended June 30, 2000 and estimated capital expenditures for the next three
years:                                                                          

CAPITAL EXPENDITURES
 (millions of dollars)

              Six months ended         Twelve months ended
             June 30, 2000                December 31,
               (actual)                  (estimated)
                     ----------------     ------------------------------
                                          2000         2001         2002
                                          ----         ----         ----
APS (a)                        $181           $380         $395         $373    
Pinnacle West Energy (b)         34            277          392          141    
SunCor                           61             53           43           51    
                           ----           ----         ----         ----
Total                          $276           $710         $830         $565    
                           ====           ====         ====         ====

(a)  Includes about $30 - $35 million each year for nuclear fuel expenditures.  
(b)  Excludes the SCE purchase agreements of approximately $550 million in 2001.
See Note 10 and "Capital Resources and Debt Financing - Pinnacle West 
Energy" below.                                                        

CAPITAL RESOURCES AND DEBT FINANCING                                  

PINNACLE WEST                                                     

The parent company's cash requirements and its ability to fund those            
requirements are discussed under "Capital Needs and Resources" in Management's  
Discussion and Analysis of Financial Condition and Results of Operation in Part 
II, Item 7 of the 1999 10-K.                                                    

During the six-months ended June 30, 2000, the parent company increased         
long-term borrowings by about $94 million.                                      

APS                                                               

APS' long-term debt redemption requirements, optional repayments on long-term   
debt, and payment obligations on a capitalized lease are: $354 million in 2000; 
$252 million in 2001; and $125 million in 2002. During the six months ended June
30, 2000, APS redeemed approximately $242 million of its long-term debt with    
cash from operations and short-term borrowings. On August 7, 2000, APS issued   
$300 million of its 7 5/8% Notes Due 2005.                                      

In 2001 APS will purchase Units 1, 2 and 3 of the West Phoenix Power Plant at   
the expiration of its lease term.                                               

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Although provisions in APS' first mortgage bond indenture, articles of          
incorporation, and ACC financing orders establish maximum amounts of additional 
first mortgage bonds and preferred stock that APS may issue, APS does not expect
any of these provisions to limit its ability to meet its capital requirements.  

PINNACLE WEST ENERGY                                              

Pinnacle West Energy has announced plans to build and acquire up to 4,000 MW of 
generating capacity from 2001-2006 at an estimated cost of about $2 billion,    
assuming all announced plants are built or acquired.                            

Pinnacle West Energy is also considering additional expansion over the next     
several years, which may result in additional expenditures. Pinnacle West       
Energy's expenditures are expected to be funded through capital infusions from  
debt issued directly by Pinnacle West Energy, as well as the parent company's   
internally generated cash and debt proceeds.                                    

Pinnacle West Energy is currently planning a 650-megawatt expansion of the West 
Phoenix Power Plant and the construction of a natural gas-fired electric        
generating station of up to 2,120 megawatts near Palo Verde, called Redhawk (see
discussion in the following paragraph). Construction at West Phoenix began in   
July 2000, with commercial operation of the first unit expected in the summer of
2001. Pinnacle West Energy also expects that construction will begin on the     
first two units of Redhawk near the end of 2000, with commercial operation      
scheduled for the summer of 2002.                                               

Pinnacle West Energy and Reliant have terminated discussions on joint           
development of the first two Redhawk units and three units in Nevada. Pinnacle  
West Energy currently plans to keep the first two units (1,060 megawatts) of the
Redhawk project on schedule.                                                    

See the above table for expected capital expenditures for these expansions on   
the current schedule.                                                           

Pinnacle West Energy has signed two separate agreements with SCE to acquire     
SCE's interest in the Palo Verde Nuclear Generating Station west of Phoenix and 
the Four Corners Power Plant near Farmington, New Mexico. Pursuant to the       
agreements, Pinnacle West Energy will acquire SCE's 15.8% interest in the three 
unit Palo Verde plant and SCE's 48% interest in Four Corners Units 4 and 5, for 
a total of approximately 1,300 MW at both plants. The total purchase price is   
$550 million, subject to certain adjustments. The transactions are expected to  
close in mid-2001 following the approval of various governmental authorities,   
including the CPUC, the FERC, the Nuclear Regulatory Commission, the Internal   
Revenue Service, and the Navajo Nation.                                         

Prior to and up to 90 days following SCE's filing with the CPUC seeking approval
of the transactions, which was made on May 15, 2000, SCE was allowed to solicit 
offers for, or indications of interest in, (a) its Four Corners interest or (b) 
its Four Corners interest and its Palo Verde interest. Pinnacle West Energy had 
the right to match any offer or indication of interest that SCE received during 
this period. This period has expired without Pinnacle West Energy matching an   
indication of interest. The Agreements permit SCE, for a period of up to 120    
days (until early December), to engage in further negotiations and discussions  
with any party who submitted an indication of interest. Subject to CPUC         
approval,                                                                       

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Pinnacle West Energy retains the right under the Agreements to match the terms  
of any binding agreement that SCE elects to enter into. For additional          
information about the transactions, see Note 10.                                

SUNCOR                                                            

SunCor's capital needs consist primarily of capital expenditures for land       
development, retail and office building construction, and home construction.    
Capital resources to meet these requirements include funds from operations and  
SunCor's own external financings.                                               

COMPETITION AND ELECTRIC INDUSTRY RESTRUCTURING                                 

See Note 5 for a discussion of regulatory accounting. See Note 6 for a          
discussion of a Settlement Agreement related to the implementation of retail    
electric competition and to Arizona and federal legal and regulatory            
developments.                                                                   

RATE MATTERS                                                                    

See Note 6 for a discussion of a price reduction effective as of July 1, 2000,  
and for a discussion of a Settlement Agreement that will, among other things,   
result in five annual price reductions over a four-year period ending July 1,   
2003.                                                                           

FORWARD-LOOKING STATEMENTS                                                      

The above discussion contains forward-looking statements that involve risks and 
uncertainties. Words such as "estimates," "expects," "anticipates," "plans,"    
"believes," "projects," and similar expressions identify forward-looking        
statements. These risks and uncertainties include, but are not limited to, the  
ongoing restructuring of the electric industry; the outcome of the regulatory   
proceedings relating to the restructuring; regulatory, tax, and environmental   
legislation; our ability to successfully compete outside traditional regulated  
markets; regional economic conditions, which could affect customer growth; the  
cost of debt and equity capital; weather variations affecting customer usage;   
technological developments in the electric industry; the successful completion  
of large-scale construction projects; the value of El Dorado's investment in a  
technology-related venture capital partnership; successfully managing market    
risks; and the strength of the real estate market.                              

These factors and the other matters discussed above may cause future results to 
differ materially from historical results, or from results or outcomes we       
currently expect or seek.                                                       

ITEM 3. MARKET RISKS                                                            

Our operations include managing market risks related to changes in commodity    
prices, interest rates, and investments held by the nuclear decommissioning     
trust fund.                                                                     

We are exposed to the impact of market fluctuations in the price and            
transportation costs of electricity, natural gas, coal, and emissions           
allowances. We employ established procedures to manage our risks associated with
these market fluctuations by utilizing various commodity derivatives, including 
exchange-traded futures and options and over-the-counter forwards, options, and 
swaps. As part of our overall risk management program, we enter                 

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into these derivative transactions to hedge purchases and sales of electricity, 
fuels and emissions allowances/credits. In addition, we engage in trading       
activities intended to profit from favorable movements of market prices.        

As of June 30, 2000, a hypothetical adverse price movement of 10% in the market 
price of our commodity derivative portfolio would decrease the fair market value
of these contracts by approximately $53 million. This analysis does not include 
the favorable impact this same hypothetical price move would have on the        
underlying physical exposures being hedged with the commodity derivative        
portfolio. We plan to move our wholesale power marketing and trading activities 
from APS to the parent company by the end of 2000.                              

We are exposed to credit losses in the event of non-performance or non-payment  
by counterparties. We use a credit management process to assess and monitor the 
financial exposure of counterparties. Despite the fact that the great majority  
of our trading counterparties are rated as investment grade by the credit rating
agencies, there is still a possibility that one or more of these companies could
default, resulting in a material impact on earnings for a given period.         

Changing interest rates will affect interest paid on variable-rate debt and     
interest earned by the nuclear decommissioning trust fund. Our policy is to     
manage interest rates through the use of a combination of fixed-rate and        
floating-rate debt. The nuclear decommissioning fund also has risks associated  
with changing market values of equity investments. Nuclear decommissioning costs
are recovered in regulated electricity prices.                                  

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 PART II - OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS                     

At our annual Meeting of Shareholders held on May 17, 2000 the following        
shareholder proposal was submitted to shareholders:                             

                                                                   Abstentions
                                    Votes            Votes          and Broker
                                    For            Against         Non Votes
                                 ---------       ----------        ---------

Proposal that Pinnacle             4,385,706       59,481,837        3,723,107  
West provide shareholders                                                       
with an energy report                                                           

In addition, at the same annual meeting, the following persons were elected as  
directors:                                                                      

                Votes            Votes
                                   For            Against          Abstain
                                 ---------       ----------        ---------
CLASS I (TERM TO EXPIRE AT                                                      
2001 ANNUAL MEETING)                                                            

Robert G. Matlock                  81,027,360           942,017          N/A    

Kathryn L. Munro                   80,935,718         1,033,659          N/A    

CLASS II (TERM TO EXPIRE AT                                                     
2002 ANNUAL MEETING)                                                            

Bruce J. Nordstrom                 81,036,103           933,274          N/A    

CLASS III (TERM TO EXPIRE AT                                                    
2003 ANNUAL MEETING)                                                            

Pamela Grant                       81,007,066           962,311          N/A    

Martha O. Hesse                    81,028,539           940,838          N/A    

William S. Jamieson, Jr.           81,020,766           948,611          N/A    

Richard Snell                      81,017,840           951,537          N/A    

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ITEM 5. OTHER INFORMATION                                                       

CONSTRUCTION AND FINANCING PROGRAMS                                   

See "Liquidity and Capital Resources" in Part I, Item 2 of this report for a    
discussion of construction and financing programs of the Company and its        
subsidiaries.                                                                   

COMPETITION AND ELECTRIC INDUSTRY RESTRUCTURING                       

See Note 6 of Notes to Condensed Consolidated Financial Statements in Part I,   
Item 1 of this report for a discussion of competition and the rules regarding   
the introduction of retail electric competition in Arizona and a settlement     
agreement with the ACC.                                                         

ENVIRONMENTAL MATTERS                                                 

EPA ENVIRONMENTAL REGULATION - CLEAN AIR ACT                          

As previously reported, EPA's final National Ambient Air Quality Standards for  
ozone and particulate matter were challenged, and the court determined that     
EPA's promulgation of the standards violated the constitutional prohibition on  
delegation of legislative power. See "Environmental Matters--EPA Environmental  
Regulation--Clean Air Act" in Part I, Item 1 of the 1999 10-K. The court        
remanded the ozone and fine particulate standards and vacated the coarse        
particulate matter standard. The U.S. Supreme Court recently agreed to review   
these decisions. We cannot currently predict the outcome of this matter.        

PURPORTED NAVAJO ENVIRONMENTAL REGULATION                             

In April 2000, the Navajo Tribal Council approved operating permit regulations  
under the Navajo Nation Air Pollution Prevention and Control Act. APS believes  
that the regulations do not recognize that the Tribe did not intend to assert   
jurisdiction over Four Corners and NGS. On July 12, 2000, the Four Corners      
participants and the NGS participants each filed a petition with the Navajo     
Supreme Court for review of the operating permit regulations. We cannot         
currently predict the outcome of this matter.                                   

As previously reported, in April 1999, APS filed a Petition for Review of EPA's 
regulations regarding issuing Federal operating permits to cover stationary     
sources on Indian reservations. See "Environmental Matters--Purported Navajo    
Environmental Regulation" in Part I, Item 1 of the 1999 10-K. On June 29, 2000, 
at the request of the Court, APS filed a motion to dismiss Four Corners from    
this petition on the grounds that the impact of the regulations on pre-existing 
binding agreements was not "ripe" for judicial resolution based on EPA's        
issuance of an official notice indicating that it had not yet determined whether
the pre-existing binding agreements with Four Corners and NGS were abrogated by 
the Clean Air Act.                                                              

WATER SUPPLY                                                          

As previously reported, APS and other parties petitioned the U.S. Supreme Court 
for review of the decision confirming that certain groundwater rights may be    
available to the federal                                                        

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government and Indian tribes. See "Water Supply" in Item I, Part 1 of the 1999  
10-K. This petition was denied, and the pending lower court litigation will     
continue.                                                                       

PURCHASED POWER AGREEMENTS                                            

As previously reported, in September 1990, APS entered into a thirty year       
agreement under which APS and PacifiCorp engage in a one-for-one seasonal       
capacity exchange. APS is entitled to receive up to 480 MW of capacity from     
PacifiCorp during APS' summer peak season (through September 15). See           
"Generating Fuel and Purchased Power - Purchased Power Agreements" in Part I,   
Item 1 of the 1999 10-K. There is currently a dispute under the Long-Term Power 
Transaction Agreement (the "Agreement") relating to the value of power delivered
to PacifiCorp under the Supplemental Energy provisions of the Agreement. As a   
result of the dispute, APS understands that PacificCorp believes it is owed     
monies by APS and, since August 8, 2000, has been withholding power due to APS  
under the terms of Agreement. APS believes PacificCorp is in breach of the      
Agreement, and the breach has been and is resulting in damage claims against    
PacifiCorp which are accruing daily in an amount dependent upon daily energy    
cost rates. The parties are currently attempting to resolve the dispute and no  
litigation or arbitration has been commenced.                                   

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                        

(a)  Exhibits                                                         

Exhibit No.      Description                                
-----------      -----------                                
27.1           Financial Data Schedule                  

           99.1           Amendment No. 14 to the ANPP Participation Agreement

    In addition to those Exhibits shown above, the Company hereby incorporates
the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation      
ss.229.10(d) by reference to the filings set forth below:                       

                                                        [Enlarge/Download Table]

Exhibit No.  Description                   Originally Filed as Exhibit:  File No.(a)  Date Effective
-----------  -----------                   ----------------------------  --------     --------------
                                                                                                    
    10.1     Articles of Incorporation     19.1 to the Company's           1-8962         11-14-88  
             restated as of July 29, 1988  September 30, 1988                                       
                                           Form 10-Q Report                                         

    10.2     Bylaws, amended as of         4.1 to the Company's            1-8962         1-20-00   
             December 15, 1999             Registration Statement                                   
                                           on Form S-8 No. 333-95035                                

    10.3     Pinnacle West Capital         99.1 to the Company's           1-8962         7-3-00    
             Corporation 2000 Director     Registration Statement                                   
             Equity Plan                   on Form S-8 (No. 333-40796)                              

    10.4     Pinnacle West Capital         99.2 to the Company's           1-8962         7-3-00    
             Corporation and Arizona       Registration Statement                                   
             Public Service Company        on Form S-8 (No. 333-40796)                              
             Directors' Retirement Plan                                                             
             (as Amended and Restated)                                                              

(b)  Reports on Form 8-K                                              

    During the quarter ended June 30, 2000, and the period from July 1 through
August 14, 2000, we filed the following report on Form 8-K:                     

  Report dated July 12, 2000, relating to a preliminary ruling issued by a
Maricopa County Superior Court judge on cross-motions for summary judgment in   
connection with lawsuits filed relating to the adoption or amendment of the     
retail electric competition rules.                                              

----------                                                                      
(a)  Reports filed under File Nos. 1-4473 and 1-8962 were filed in the office of
the Securities and Exchange Commission located in Washington, D.C.    

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SIGNATURES

  Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the           
undersigned thereunto duly authorized.                                          

                                 PINNACLE WEST CAPITAL CORPORATION
                (Registrant)

Dated: August 14, 2000                 By: Chris N. Froggatt                    
                                            ------------------------------------
                         Chris N. Froggatt
                                     Vice President and Controller
                                     (Principal Accounting Officer
                                   and Officer Duly Authorized
                            to sign this Report)

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘10-Q’ Filing	Date	First	Last	Other Filings

	12/31/04	11		10-K, 11-K, 8-K, U-3A-2
	7/1/04	11	12	4
	6/30/04	10		10-Q, 8-K
	1/1/04	11
	7/1/03	11	26	4, 4/A
	12/31/02	12	14	10-K, 11-K, 5, 8-K, U-3A-2
	1/1/01	11	13
	12/31/00	14		10-K, 11-K, U-3A-2
Filed on:	8/14/00	31	32
	8/11/00	1
	8/8/00	30
	8/7/00	24
	7/12/00	12	31	8-K
	7/1/00	11	26
For Period End:	6/30/00	1	31	S-8 POS
	6/29/00	29
	5/17/00	28		3, DEF 14A
	5/15/00	17	25	10-Q
	4/27/00	17
	3/17/00	13
	1/14/00	13
	1/1/00	11
	12/31/99	2	23	10-K, 11-K, 5, U-3A-2
	12/15/99	31
	12/13/99	10
	12/8/99	12
	9/24/99	11
	9/23/99	10
	9/21/99	12		8-K
	7/1/99	11	14
	6/30/99	16	22	10-Q, 8-K
	5/14/99	10		8-K
	1/1/99	13
	12/31/98	14		10-K405, 11-K, U-3A-2
	7/1/98	14
	7/1/97	14		4
	7/1/96	14
				List all Filings

4 Subsequent Filings that Reference this Filing

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 2/27/24  Pinnacle West Capital Corp.       10-K       12/31/23  147:25M
 2/27/23  Pinnacle West Capital Corp.       10-K       12/31/22  146:28M
 2/25/22  Pinnacle West Capital Corp.       10-K       12/31/21  150:28M
 2/24/21  Pinnacle West Capital Corp.       10-K       12/31/20  144:26M

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Filing Submission 0000950147-00-001246 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Pinnacle West Capital Corp – ‘10-Q’ for 6/30/00

On: Monday, 8/14/00, at 4:36pm ET · For: 6/30/00 · Accession #: 950147-0-1246 · File #: 1-08962

Quarterly Report — Form 10-QFiling Table of Contents

10-Q — Quarterly Report for the Qtr Ended 6/30/00Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

4 Subsequent Filings that Reference this Filing

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10-Q — Quarterly Report for the Qtr Ended 6/30/00
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