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 March 31, 1995
--------------------------
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 1-4473
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ARIZONA PUBLIC SERVICE COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0011170
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona 85072-3999
- -------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 250-1000
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(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, $2.50 par value,
outstanding as of May 12, 1995: 71,264,947
<PAGE>
-i-
Glossary
ACC - Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
Company - Arizona Public Service Company
CSW - Central and South West Corporation
EPA - Environmental Protection Agency
EPEC - El Paso Electric Company
Four Corners - Four Corners Power Plant
ITCs - Investment tax credits
1994 10-K - Arizona Public Service Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1994
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
SFAS No. 71 - Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation"
SFAS No. 121 - Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of"
INDEPENDENT ACCOUNTANTS' REPORT
Arizona Public Service Company:
We have reviewed the accompanying condensed balance sheet of Arizona Public
Service Company as of March 31, 1995 and the related condensed statements of
income for the three-month and twelve-month periods ended March 31, 1995 and
1994 and cash flows for the three-month periods ended March 31, 1995 and 1994.
These condensed financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Arizona Public Service Company as of December
31, 1994 and the related statements of income, retained earnings, and cash
flows for the year then ended (not presented herein); and in our report dated
March 3, 1995, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of December 31, 1994 is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
May 11, 1995
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
1995 1994
--------- ---------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES ......................... $ 336,968 $ 346,049
--------- ---------
FUEL EXPENSES:
Fuel for electric generation ...................... 46,710 57,968
Purchased power ................................... 8,210 10,063
--------- ---------
Total .......................................... 54,920 68,031
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES ............... 282,048 278,018
--------- ---------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses ................ 65,566 66,336
Maintenance ....................................... 25,866 31,285
Depreciation and amortization ..................... 60,426 57,910
Income taxes - current ............................ 17,167 12,944
Income taxes - deferred ........................... 4,455 8,192
Other taxes ....................................... 35,354 34,204
--------- ---------
Total .......................................... 208,834 210,871
--------- ---------
OPERATING INCOME .................................... 73,214 67,147
--------- ---------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity .................................... 1,186 846
Palo Verde accretion income ....................... -- 19,980
Other - net ....................................... 4,784 (396)
Income taxes - current ............................ (2,061) 506
Income taxes - deferred ........................... 3,783 (7,299)
--------- ---------
Total .......................................... 7,692 13,637
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS ................... 80,906 80,784
--------- ---------
INTEREST DEDUCTIONS:
Interest on long-term debt ........................ 41,872 39,476
Interest on short-term borrowings ................. 1,224 1,595
Debt discount, premium and expense ................ 1,974 2,412
AFUDC - debt ...................................... (1,996) (1,167)
--------- ---------
Total .......................................... 43,074 42,316
--------- ---------
NET INCOME .......................................... 37,832 38,468
PREFERRED STOCK DIVIDEND REQUIREMENTS ............... 4,807 7,510
--------- ---------
EARNINGS FOR COMMON STOCK ........................... $ 33,025 $ 30,958
========= =========
See Notes to Condensed Financial Statements.
<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Twelve Months
Ended March 31,
1995 1994
----------- -----------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES ...................... $ 1,617,087 $ 1,594,572
----------- -----------
FUEL EXPENSES:
Fuel for electric generation ................... 225,845 234,394
Purchased power ................................ 61,733 68,679
----------- -----------
Total ....................................... 287,578 303,073
----------- -----------
OPERATING REVENUES LESS FUEL EXPENSES ............ 1,329,509 1,291,499
----------- -----------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses ............. 291,522 285,822
Maintenance .................................... 114,210 121,904
Depreciation and amortization .................. 238,624 225,031
Income taxes - current ......................... 110,872 91,090
Income taxes - deferred ........................ 57,816 69,579
Other taxes .................................... 141,965 137,879
----------- -----------
Total ....................................... 955,009 931,305
----------- -----------
OPERATING INCOME ................................. 374,500 360,194
----------- -----------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity .................................. 4,281 2,520
Palo Verde accretion income ..................... 13,616 76,870
Other - net ..................................... 21,195 (2,001)
Income taxes - current .......................... 3,363 4,309
Income taxes - deferred ......................... (3,890) (26,238)
----------- -----------
Total ....................................... 38,565 55,460
----------- -----------
INCOME BEFORE INTEREST DEDUCTIONS ................ 413,065 415,654
----------- -----------
INTEREST DEDUCTIONS:
Interest on long-term debt ..................... 162,236 162,275
Interest on short-term borrowings .............. 5,834 6,776
Debt discount, premium and expense ............. 8,416 9,349
AFUDC - debt ................................... (6,271) (4,434)
----------- -----------
Total ....................................... 170,215 173,966
----------- -----------
NET INCOME ....................................... 242,850 241,688
PREFERRED STOCK DIVIDEND REQUIREMENTS ............ 22,571 30,461
----------- -----------
EARNINGS FOR COMMON STOCK ........................ $ 220,279 $ 211,227
=========== ===========
See Notes to Condensed Financial Statements.
<PAGE>
<TABLE>
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
ASSETS
(Unaudited)
<CAPTION>
March 31, December 31,
1995 1994
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
UTILITY PLANT:
Electric plant in service and held for future use .................. $ 6,499,665 $ 6,475,249
Less accumulated depreciation and amortization ..................... 2,175,110 2,122,439
----------- -----------
Total ........................................................... 4,324,555 4,352,810
Construction work in progress ...................................... 234,865 224,312
Nuclear fuel, net of amortization .................................. 62,857 46,951
----------- -----------
Utility plant - net ............................................. 4,622,277 4,624,073
----------- -----------
INVESTMENTS AND OTHER ASSETS : ............................................ 91,554 90,105
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents .......................................... 9,898 6,532
Accounts receivable:
Service customers ............................................... 79,368 103,711
Other ........................................................... 23,551 27,008
Allowance for doubtful accounts ................................. (1,271) (2,176)
Accrued utility revenues ........................................... 45,547 55,432
Materials and supplies, at average cost ............................ 90,872 89,864
Fossil fuel, at average cost ....................................... 35,762 35,735
Deferred income taxes .............................................. 16,917 19,114
Other .............................................................. 16,991 14,162
----------- -----------
Total current assets ............................................ 317,635 349,382
----------- -----------
DEFERRED DEBITS:
Regulatory asset for income taxes .................................. 555,004 557,049
Palo Verde Unit 3 cost deferral .................................... 290,296 292,586
Palo Verde Unit 2 cost deferral .................................... 170,421 171,936
Unamortized costs of reacquired debt ............................... 60,827 60,942
Unamortized debt issue costs ....................................... 19,150 17,673
Other .............................................................. 193,786 184,515
----------- -----------
Total deferred debits ........................................... 1,289,484 1,284,701
----------- -----------
TOTAL ........................................................... $ 6,320,950 $ 6,348,261
=========== ===========
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
LIABILITIES
(Unaudited)
<CAPTION>
March 31, December 31,
1995 1994
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION:
Common stock ............................................. $ 178,162 $ 178,162
Premiums and expenses - net .............................. 1,039,299 1,039,303
Retained earnings ........................................ 344,180 353,655
---------- ----------
Common stock equity ................................... 1,561,641 1,571,120
Non-redeemable preferred stock ........................... 193,561 193,561
Redeemable preferred stock ............................... 75,000 75,000
Long-term debt less current maturities ................... 2,156,828 2,181,832
---------- ----------
Total capitalization .................................. 3,987,030 4,021,513
---------- ----------
CURRENT LIABILITIES:
Commercial paper ......................................... 80,500 131,500
Current maturities of long-term debt ..................... 53,364 3,428
Accounts payable ......................................... 75,721 110,854
Accrued taxes ............................................ 142,941 89,412
Accrued interest ......................................... 34,451 45,170
Other .................................................... 60,769 50,487
---------- ----------
Total current liabilities ............................. 447,746 430,851
---------- ----------
DEFERRED CREDITS AND OTHER:
Deferred income taxes .................................... 1,436,473 1,436,184
Deferred investment tax credit ........................... 139,136 142,994
Unamortized gain - sale of utility plant ................. 96,352 98,551
Customer advances for construction ....................... 17,628 16,564
Other .................................................... 196,585 201,604
---------- ----------
Total deferred credits and other ...................... 1,886,174 1,895,897
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 8)
TOTAL ................................................. $6,320,950 $6,348,261
========== ==========
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months
Ended March 31,
-------------------
1995 1994
--------- -------
(Thousands of Dollars)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ............................................. $ 37,832 $ 38,468
Items not requiring cash:
Depreciation and amortization ........................ 60,426 57,910
Nuclear fuel amortization ............................ 7,723 6,433
AFUDC - equity ....................................... (1,186) (846)
Deferred income taxes - net .......................... 4,531 16,580
Deferred investment tax credit - net ................. (3,858) (1,089)
Refund obligation - net .............................. -- (5,344)
Palo Verde accretion income .......................... -- (19,980)
Changes in certain current assets and liabilities:
Accounts receivable - net ............................ 26,895 25,327
Accrued utility revenues ............................. 9,885 12,115
Materials, supplies and fossil fuel .................. (1,035) 4,412
Other current assets ................................. (2,829) (2,302)
Accounts payable ..................................... (26,184) (17,920)
Accrued taxes ........................................ 53,529 44,601
Accrued interest ..................................... (10,719) (7,759)
Other current liabilities ............................ 10,302 12,863
Other - net ............................................ (12,566) 2,993
--------- ---------
Net cash flow provided by operating activities ..... 152,746 166,462
--------- ---------
Cash Flows from Financing Activities:
Long-term debt ......................................... 73,811 98,899
Short-term borrowings - net ............................ (51,000) (69,000)
Dividends paid on common stock ......................... (42,500) (42,500)
Dividends paid on preferred stock ...................... (4,827) (7,621)
Repayment of preferred stock ........................... (4) (14,225)
Repayment and reacquisition of long-term debt .......... (51,867) (60,285)
--------- ---------
Net cash flow used for financing activities ....... (76,387) (94,732)
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures ................................... (72,730) (68,684)
AFUDC - equity ......................................... 1,186 846
Other .................................................. (1,449) (2,842)
--------- ---------
Net cash flow used for investing activities ........ (72,993) (70,680)
--------- ---------
Net increase in cash and cash equivalents ................ 3,366 1,050
Cash and cash equivalents at beginning of period ......... 6,532 7,557
--------- ---------
Cash and cash equivalents at end of period ............... $ 9,898 $ 8,607
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) ............ $ 51,900 $ 47,246
Income taxes ......................................... $ -- $ --
See Notes to Condensed Financial Statements.
</TABLE>
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company as of March
31, 1995, the results of operations for the three months and twelve months ended
March 31, 1995 and 1994, and the cash flows for the three months ended March 31,
1995 and 1994. It is suggested that these condensed financial statements and
notes to condensed financial statements be read in conjunction with the
financial statements and notes to financial statements included in the 1994
10-K. Consistent with the 1995 presentation, prior year's electric operating
revenues and other taxes have been restated to exclude sales tax on electric
revenues.
2. The Company's operations are subject to seasonal fluctuations, with
variations occurring in energy usage by customers from season to season and from
month to month within a season, primarily as a result of changing weather
conditions. For this and other reasons, the results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year.
3. All the outstanding shares of common stock of the Company are owned by
Pinnacle West. Pursuant to a Pledge Agreement, dated as of January 31, 1990, and
as part of a restructuring of substantially all of its outstanding indebtedness,
Pinnacle West granted certain of its lenders a security interest in all of the
Company's outstanding common stock.
4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for
changes in capitalization since December 31, 1994.
5. In May 1994, the ACC approved a retail rate settlement agreement which
provided for a net annual retail rate reduction of approximately $32.3 million
($19 million after tax), or 2.2% on average, effective June 1, 1994. As part of
the settlement, the Company reversed approximately $20 million of depreciation
($15 million after tax) related to a 1991 Palo Verde write-off. The 1994 rate
settlement also provided for the accelerated amortization of substantially all
deferred ITCs over a five-year period beginning in 1995. In addition, the 1994
rate settlement included a moratorium on filing for permanent rate changes,
except under certain circumstances, prior to the end of 1996 for both the
Company and the ACC staff, and an incentive rewarding reduction in fuel and
operating and maintenance cost per kilowatt-hour below established targets.
6. 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. The maximum
assessment per reactor under the retrospective rating program for each nuclear
incident is approximately $79 million, subject to an annual limit of $10 million
per incident. Based upon the Company's 29.1% interest in the three Palo Verde
units, the Company's maximum potential assessment per incident is approximately
$69 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 $2.78 billion, a substantial portion of
which must first be applied to stabilization and decontamination. The Company
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.
7. The Company has encountered tube cracking in the Palo Verde steam generators
and has taken, and will continue to take, remedial actions that it believes have
slowed further tube problems to manageable levels. Although the steam generators
are capable of operating for their designed life of 40 years, the Company
believes that, at some point, long-term economic considerations could make steam
generator replacement desirable.
8. El Paso Electric Company, one of the joint owners of Palo Verde and Four
Corners, has been operating under Chapter 11 of the Bankruptcy Code since 1992.
A plan whereby EPEC would become a wholly-owned subsidiary of Central and South
West Corporation has been confirmed by the bankruptcy court, but cannot become
fully effective until several other approvals are obtained. Under the plan,
certain issues, including EPEC allegations regarding the 1989-1990 Palo Verde
outages, would be resolved, and EPEC would assume the joint facilities operating
agreements. CSW has stated that several matters have arisen which may impede
completion of the merger. If the plan is not approved, the Company does not
expect that there would be a material adverse effect on its operations or
financial position.
ARIZONA PUBLIC SERVICE COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Operating Results
The following table summarizes the Company's revenues and earnings for the
three-month and twelve-month periods ended March 31, 1995 and 1994:
Periods ended March 31
(Thousands of Dollars)
Three Months Twelve Months
----------------------- -----------------------
1995 1994 1995 1994
----------------------- -----------------------
Operating revenues ......... $ 336,968 $ 346,049 $1,617,087 $1,594,572
Earnings for common
stock ...................... $ 33,025 $ 30,958 $ 220,279 $ 211,227
Operating Results - Three-month period ended March 31, 1995 compared to
three-month period ended March 31, 1994
Earnings increased in the three-month period ended March 31, 1995
primarily due to lower fuel costs, lower operations and maintenance expenses, a
gain recognized on the sale of a small subsidiary, and lower preferred stock
dividends. Fuel expense was lower due largely to lower average fuel costs
resulting from increased nuclear generation and lower natural gas and coal
prices. Operations and maintenance expenses decreased due to improved Palo Verde
operations and lower fossil plant overhaul costs. Preferred stock dividends
decreased due to less preferred stock outstanding. Partially offsetting these
positive factors were decreased operating revenues and the absence of non-cash
income related to a 1991 rate settlement, which the Company completed recording
in May 1994 (see "Other Income" below). Operating revenues were down primarily
due to milder weather and a retail rate reduction which became effective June 1,
1994 (see Note 5 of Notes to Condensed Financial Statements in Part I, Item 1 of
this report), partially offset by customer growth. The effects of the rate
reduction were substantially offset by the accelerated amortization of
investment tax credits provided for in the 1994 rate settlement.
Operating Results - Twelve-month period ended March 31, 1995 compared
to twelve-month period ended March 31, 1994
Earnings increased in the twelve-month period ended March 31, 1995
primarily due to increased operating revenues, lower fuel expenses, and lower
preferred stock dividends. Operating revenues were up due to customer growth and
warmer weather, partially offset by a retail rate reduction which became
effective June 1, 1994. The effects of the rate reduction were offset by the
reversal of certain previously recorded depreciation related to Palo Verde (see
Note 5 of Notes to Condensed Financial Statements in Part I, Item 1 of this
report) and the accelerated amortization of investment tax credits. Although
sales were up, fuel expenses were down primarily due to lower average fuel costs
resulting from increased nuclear generation. Preferred stock dividends were
lower due to less preferred stock outstanding. Partially offsetting these
positive factors were the decrease in non-cash income related to the 1991 rate
settlement (see "Other Income" below) and increased depreciation expense.
Depreciation expense was up primarily due to higher plant balances and increased
nuclear decommissioning costs reflecting the most recent site-specific study.
Other Income
Other income reflects accounting practices required for regulated
public utilities and represents a composite of cash and non-cash items,
including AFUDC. For the three months ended March 31, 1995, other income
included a gain of about $5 million on the sale of a small subsidiary. Included
in other income for the twelve months ended March 31, 1995, were $8.2 million of
after-tax accretion income on Palo Verde Unit 3 and a one-time depreciation
reversal related to Palo Verde of approximately $15.0 million, after tax. See
Note 5 of Notes to Condensed Financial Statements in Part I, Item 1 of this
report.
Other non-cash income, in the twelve months ended March 31, 1995,
included $2.4 million of after-tax income (included in operating revenues) from
the reversal of the Palo Verde refund obligation which was recorded in
accordance with the 1991 rate settlement. The Company has recorded all of the
Unit 3 accretion income and refund reversals related to the 1991 rate
settlement. See Note 1 of Notes to Financial Statements in Part II, Item 8 of
the 1994 10-K.
Liquidity and Capital Resources
For the three months ended March 31, 1995, the Company incurred
approximately $61 million in construction expenditures, accounting for
approximately 20% of the most recently estimated 1995 construction expenditures.
The Company has estimated total construction expenditures for the years 1995,
1996, and 1997 to be approximately $300 million, $257 million, and $236 million,
respectively. These amounts include about $27 million each year for nuclear fuel
expenditures.
Since December 31, 1994, the Company has (i) issued $75 million of its
Junior Subordinated Deferrable Interest Debentures ("MIDS"), (ii) incurred
approximately $4 million of long-term debt in connection with a tax-exempt
financing, (iii) redeemed on March 2, 1995, $49.15 million of its First Mortgage
Bonds, 10.25% Series due 2000, (iv) repurchased on March 17, 1995, approximately
$2.5 million of its First Mortgage Bonds, 9 1/2% Series due 2021, and (v)
redeemed on May 1, 1995, $50 million of its First Mortgage Bonds, 13 1/4% Series
due 2007 (the "13 1/4% Bonds").
Refunding obligations for preferred stock and long-term debt, a
capitalized lease obligation, and certain actual and anticipated early
redemptions, including premiums thereon, are expected to total approximately
$109 million, $4 million, and $164 million for the years 1995, 1996, and 1997,
respectively. During the first three months of 1995, the Company refunded
approximately $52 million (48%) of the estimated 1995 total.
Provisions in the Company's mortgage bond indenture and articles of
incorporation require certain coverage ratios to be met before the Company can
issue additional first mortgage bonds or preferred stock. In addition, the bond
indenture limits the amount of additional first mortgage bonds which may be
issued to a percentage of net property additions, to the amount of certain first
mortgage bonds that have been redeemed or retired, and/or to cash deposited with
the mortgage bond trustee. As of March 31, 1995, and adjusting for the (i)
incurrence of approximately $4 million of long-term debt in connection with a
tax-exempt financing and (ii) redemption of the 13 1/4% Bonds, the Company
estimates that the mortgage bond indenture and the articles of incorporation
would have allowed the Company to issue up to approximately $1.417 billion and
$928 million of additional first mortgage bonds and preferred stock,
respectively.
The ACC has authority over the Company with respect to the issuance of
long-term debt and equity securities. Existing ACC orders allow the Company to
have up to approximately $2.6 billion in long-term debt and approximately $501
million of preferred stock outstanding at any one time.
Management does not expect any of the foregoing restrictions to limit
the Company's ability to meet its capital requirements.
Accounting Issue
In March 1995 the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which is effective in 1996. This statement requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss would be recognized if the sum of the estimated future
undiscounted cash flows to be generated by an asset is less than its carrying
value. The amount of the loss would be based on a comparison of book value to
fair value. The standard also amends SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," to require write-off of a regulatory asset if it
is no longer probable that future revenues will recover the cost of the asset.
This new standard does not impact the Company at this time, however, it will be
reviewed on an ongoing basis.
Competition
A significant challenge for the Company will be how well it is able to
respond to increasingly competitive conditions in the electric utility industry,
while continuing to earn an acceptable return for its shareholders. Strategies
emphasize managing costs, stabilizing electric rates, negotiating long-term
contracts with large customers and capitalizing on the growth characteristics of
its service territory.
One of the issues that must be addressed responsibly is the recovery in
a more competitive environment of the carrying value of assets acquired or
recorded under the existing regulatory environment.
Pursuant to the 1994 rate settlement, APS and the ACC staff will
develop certain procedures that are responsive to the competitive forces in
larger customer segments, with the objective of making joint recommendations to
the ACC in 1995. A separate ACC proceeding on competition was opened by the ACC
in mid-1994 and is expected to continue for some months.
As the forces of competition continue to impact the industry, it will
become clearer as to what customer sectors and what regions will be most
affected and what strategies are best to deal with those forces.
PART II - OTHER INFORMATION
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 the Company's construction and financing programs.
Environmental Matters
As previously reported, on November 24, 1994, the United States Court of
Appeals for the District of Columbia Circuit vacated the rules for nitrogen
oxides emissions limitations and remanded them to the EPA for further
consideration. See "Environmental Matters" in Part I, Item 1 of the 1994 10-K.
On March 28, 1995, the EPA issued revised rules for nitrogen oxides emissions
limitations, which will require the Company to install additional pollution
control equipment at Four Corners. In the year 2000 Four Corners must comply
with either these or more stringent requirements which might be promulgated by
the EPA. The EPA has until 1997 to set more stringent requirements. Based on
its initial evaluation, the Company currently estimates its capital cost of
complying with the March 28 rules will be approximately $20 million, most of
which will be incurred in 1997.
As previously reported, the EPA established a "Grand Canyon Visibility
Transport Commission" to complete a study by November 1995 on visibility
impairment in the "Golden Circle of National Parks" in the Colorado Plateau.
See "Environmental Matters" in Part I, Item 1 of the 1994 10-K. The EPA
recently agreed to the extension of the completion of this study until March
or April 1996.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
15.1 Letter in Lieu of Consent
Regarding Unaudited Interim
Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1995, and the period ended May 12,
1995, the Company filed the following reports on Form 8-K:
Report filed January 11, 1995, comprised of exhibits to the Company's
Registration Statements (Registration Nos. 33-61228 and 33-55473) relating to
the Company's offering of $75 million of its Junior Subordinated Deferrable
Interest Debentures.
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.
ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
Dated: May 12, 1995 By Jaron B. Norberg
------------------------- ----------------
Jaron B. Norberg
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Officer Duly Authorized
to sign this
Report)
Exhibit 15.1
May 11, 1995
Arizona Public Service Company
Post Office Box 53999
Phoenix, Arizona 85072-3999
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Arizona Public Service Company for the periods ended March 31,
1995 and 1994, as indicated in our report dated May 11, 1995; because we did
not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is
incorporated by reference in Registration Statement Nos. 33-51085, 33-57822,
33-61228 and 33-55473 on Form S-3.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1993, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of the Act.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
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