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, 1995
-----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4473
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ARIZONA PUBLIC SERVICE COMPANY
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(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
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(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 August 9, 1995: 71,264,947
<PAGE>
-i-
Glossary
--------
ACC - Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
Company - Arizona Public Service Company
EPA - Environmental Protection Agency
EPEC - El Paso Electric Company
Four Corners - Four Corners Power Plant
ITCs - Investment tax credits
NNEPA - The Navajo Nation Environmental Protection Agency
1935 Act - Public Utility Holding Company Act of 1935
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
SEC - Securities and Exchange Commission
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"
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Arizona Public Service Company:
We have reviewed the accompanying condensed balance sheet of Arizona Public
Service Company as of June 30, 1995 and the related condensed statements of
income for the three-month, six-month and twelve-month periods ended June 30,
1995 and 1994 and cash flows for the six-month periods ended June 30, 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
August 8, 1995
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Three Months
Ended June 30,
----------------------
1995 1994
---- ----
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES .................... $ 380,178 $ 397,156
--------- ---------
FUEL EXPENSES:
Fuel for electric generation ................. 44,823 60,090
Purchased power .............................. 17,814 16,304
--------- ---------
Total ..................................... 62,637 76,394
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES .......... 317,541 320,762
--------- ---------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses ........... 65,794 76,107
Maintenance .................................. 28,457 32,337
Depreciation and amortization ................ 60,413 57,664
Income taxes - current ....................... 31,308 15,250
Income taxes - deferred ...................... 7,605 19,192
Other taxes .................................. 35,245 36,605
--------- ---------
Total ..................................... 228,822 237,155
--------- ---------
OPERATING INCOME ............................... 88,719 83,607
--------- ---------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ............................... 1,348 977
Palo Verde accretion income .................. -- 13,616
Other - net .................................. (1,253) 19,572
Income taxes - current ....................... 1,125 1,411
Income taxes - deferred ...................... 5,678 (10,118)
--------- ---------
Total ..................................... 6,898 25,458
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS .............. 95,617 109,065
--------- ---------
INTEREST DEDUCTIONS:
Interest on long-term debt ................... 40,051 40,564
Interest on short-term borrowings ............ 2,433 1,539
Debt discount, premium and expense ........... 2,036 2,461
AFUDC - debt ................................. (2,355) (1,350)
--------- ---------
Total ..................................... 42,165 43,214
--------- ---------
NET INCOME ..................................... 53,452 65,851
PREFERRED STOCK DIVIDEND REQUIREMENTS .......... 4,776 6,972
--------- ---------
EARNINGS FOR COMMON STOCK ...................... $ 48,676 $ 58,879
========= =========
See Notes to Condensed Financial Statements.
<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Six Months
Ended June 30,
----------------------
1995 1994
---- ----
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES ...................... $ 717,146 $ 743,205
--------- ---------
FUEL EXPENSES:
Fuel for electric generation ................... 91,533 118,058
Purchased power ................................ 26,024 26,367
--------- ---------
Total ....................................... 117,557 144,425
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES ............ 599,589 598,780
--------- ---------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses ............. 131,360 142,443
Maintenance .................................... 54,323 63,622
Depreciation and amortization .................. 120,839 115,574
Income taxes - current ......................... 48,475 28,194
Income taxes - deferred ........................ 12,060 27,384
Other taxes .................................... 70,599 70,809
--------- ---------
Total ....................................... 437,656 448,026
--------- ---------
OPERATING INCOME ................................. 161,933 150,754
--------- ---------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ................................. 2,534 1,823
Palo Verde accretion income .................... -- 33,596
Other - net .................................... 3,531 19,176
Income taxes - current ......................... (936) 1,917
Income taxes - deferred ........................ 9,461 (17,417)
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Total ....................................... 14,590 39,095
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS ................ 176,523 189,849
--------- ---------
INTEREST DEDUCTIONS:
Interest on long-term debt ..................... 81,923 80,040
Interest on short-term borrowings .............. 3,657 3,134
Debt discount, premium and expense ............. 4,010 4,873
AFUDC - debt ................................... (4,351) (2,517)
--------- ---------
Total ....................................... 85,239 85,530
--------- ---------
NET INCOME ....................................... 91,284 104,319
PREFERRED STOCK DIVIDEND REQUIREMENTS ............ 9,583 14,482
--------- ---------
EARNINGS FOR COMMON STOCK ........................ $ 81,701 $ 89,837
========= =========
See Notes to Condensed Financial Statements.
<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Twelve Months
Ended June 30,
----------------------
1995 1994
---- ----
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES .................. $ 1,600,109 $ 1,603,857
----------- -----------
FUEL EXPENSES:
Fuel for electric generation ............... 210,578 239,455
Purchased power ............................ 63,243 68,406
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Total ................................... 273,821 307,861
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OPERATING REVENUES LESS FUEL EXPENSES ........ 1,326,288 1,295,996
----------- -----------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses ......... 281,209 294,550
Maintenance ................................ 110,330 127,429
Depreciation and amortization .............. 241,373 227,121
Income taxes - current ..................... 126,930 79,845
Income taxes - deferred .................... 46,229 75,954
Other taxes ................................ 140,605 139,560
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Total ................................... 946,676 944,459
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OPERATING INCOME ............................. 379,612 351,537
----------- -----------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ............................. 4,652 2,739
Palo Verde accretion income ................ -- 72,017
Other - net ................................ 370 18,424
Income taxes - current ..................... 3,077 4,692
Income taxes - deferred .................... 11,906 (29,983)
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Total ................................... 20,005 67,889
----------- -----------
INCOME BEFORE INTEREST DEDUCTIONS ............ 399,617 419,426
----------- -----------
INTEREST DEDUCTIONS:
Interest on long-term debt ................. 161,723 161,757
Interest on short-term borrowings .......... 6,728 6,696
Debt discount, premium and expense ......... 7,991 9,502
AFUDC - debt ............................... (7,276) (4,704)
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Total ................................... 169,166 173,251
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NET INCOME ................................... 230,451 246,175
PREFERRED STOCK DIVIDEND REQUIREMENTS ........ 20,375 29,785
----------- -----------
EARNINGS FOR COMMON STOCK .................... $ 210,076 $ 216,390
=========== ===========
See Notes to Condensed Financial Statements.
<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
ASSETS
(Unaudited)
June 30, December 31,
1995 1994
---- ----
(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and
held for future use ................... $ 6,543,633 $ 6,475,249
Less accumulated depreciation
and amortization ...................... 2,218,912 2,122,439
----------- -----------
Total ................................. 4,324,721 4,352,810
Construction work in progress ............ 243,479 224,312
Nuclear fuel, net of amortization ........ 56,258 46,951
----------- -----------
Utility plant - net ................... 4,624,458 4,624,073
----------- -----------
INVESTMENTS AND OTHER ASSETS : ................... 97,957 90,105
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CURRENT ASSETS:
Cash and cash equivalents ................ 13,570 6,532
Accounts receivable:
Service customers ..................... 87,009 103,711
Other ................................. 20,522 27,008
Allowance for doubtful accounts ....... (1,322) (2,176)
Accrued utility revenues ................. 65,334 55,432
Materials and supplies, at average cost .. 88,763 89,864
Fossil fuel, at average cost ............. 29,464 35,735
Deferred income taxes .................... 13,712 19,114
Other .................................... 18,557 14,162
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Total current assets .................. 335,609 349,382
----------- -----------
DEFERRED DEBITS:
Regulatory asset for income taxes ........ 551,630 557,049
Palo Verde Unit 3 cost deferral .......... 288,006 292,586
Palo Verde Unit 2 cost deferral .......... 168,905 171,936
Unamortized costs of reacquired debt ..... 62,992 60,942
Unamortized debt issue costs ............. 19,001 17,673
Other .................................... 197,262 184,515
----------- -----------
Total deferred debits ................. 1,287,796 1,284,701
----------- -----------
TOTAL ................................. $ 6,345,820 $ 6,348,261
=========== ===========
See Notes to Condensed Financial Statements.
<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
LIABILITIES
(Unaudited)
June 30, December 31,
1995 1994
---- ----
(Thousands of Dollars)
CAPITALIZATION:
Common stock ................................. $ 178,162 $ 178,162
Premiums and expense - net ................... 1,039,546 1,039,303
Retained earnings ............................ 307,608 353,655
---------- ----------
Common stock equity ....................... 1,525,316 1,571,120
Non-redeemable preferred stock ............... 193,561 193,561
Redeemable preferred stock ................... 75,000 75,000
Long-term debt less current maturities ....... 2,159,747 2,181,832
---------- ----------
Total capitalization ...................... 3,953,624 4,021,513
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CURRENT LIABILITIES:
Commercial paper ............................. 179,255 131,500
Current maturities of long-term debt ......... 3,443 3,428
Accounts payable ............................. 72,603 110,854
Accrued taxes ................................ 100,448 89,412
Accrued interest ............................. 41,445 45,170
Common dividends payable ..................... 57,500 --
Other ........................................ 61,359 50,487
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Total current liabilities ................. 516,053 430,851
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DEFERRED CREDITS AND OTHER:
Deferred income taxes ........................ 1,438,184 1,436,184
Deferred investment tax credit ............... 132,771 142,994
Unamortized gain - sale of utility plant ..... 94,154 98,551
Customer advances for construction ........... 18,602 16,564
Other ........................................ 192,432 201,604
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Total deferred credits and other .......... 1,876,143 1,895,897
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COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 8)
TOTAL ..................................... $6,345,820 $6,348,261
========== ==========
See Notes to Condensed Financial Statements.
<PAGE>
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
Six Months
Ended June 30,
----------------------
1995 1994
---- ----
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income ......................................... $ 91,284 $ 104,319
Items not requiring cash:
Depreciation and amortization .................... 120,839 115,574
Nuclear fuel amortization ........................ 15,193 12,848
AFUDC - equity ................................... (2,534) (1,823)
Deferred income taxes - net ...................... 12,821 47,547
Deferred investment tax credit - net ............. (10,223) (2,746)
Revenue refund reversal .......................... -- (9,308)
Palo Verde accretion income ...................... -- (33,596)
Changes in certain current assets and liabilities:
Accounts receivable - net ........................ 22,334 10,545
Accrued utility revenues ......................... (9,902) (10,116)
Materials, supplies and fossil fuel .............. 7,372 10,786
Other current assets ............................. (4,395) (2,342)
Accounts payable ................................. (21,508) 13,339
Accrued taxes .................................... 11,036 (2,277)
Accrued interest ................................. (3,725) (666)
Other current liabilities ........................ 7,713 8,485
Other - net ........................................ (12,308) (10,392)
--------- --------
Net cash flow provided by operating activities . 223,997 250,177
--------- --------
Cash Flows from Financing Activities:
Long-term debt ..................................... 79,348 401,168
Short-term borrowings - net ........................ 47,755 (28,500)
Dividends paid on common stock ..................... (70,000) (62,500)
Dividends paid on preferred stock .................. (9,584) (14,945)
Repayment of preferred stock ....................... (4) (54,096)
Repayment and reacquisition of long-term debt ...... (108,044) (367,044)
--------- --------
Net cash flow used for financing activities ... (60,529) (125,917)
--------- --------
Cash Flows from Investing Activities:
Capital expenditures ............................... (151,112) (121,691)
AFUDC - equity ..................................... 2,534 1,823
Other .............................................. (7,852) (4,663)
--------- --------
Net cash flow used for investing activities .... (156,430) (124,531)
--------- --------
Net increase (decrease) in cash and cash equivalents . 7,038 (271)
Cash and cash equivalents at beginning of period ..... 6,532 7,557
--------- --------
Cash and cash equivalents at end of period ........... $ 13,570 $ 7,286
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) ........ $ 85,583 $ 81,106
Income taxes ..................................... $ 41,515 $ 29,047
See Notes to Condensed Financial Statements.
<PAGE>
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 June 30, 1995, the results of operations for the three months, six months and
twelve months ended June 30, 1995 and 1994, and the cash flows for the six
months ended June 30, 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 the rate of tube degradation. The projected service life of
the steam generators is reassessed periodically in conjunction with inspections
made during scheduled outages of the Palo Verde units. The Company's ongoing
analyses indicate that it will be economically desirable for the Company to
replace the Unit 2 steam generators, which have been most affected by tube
cracking, in five to ten years. The Company expects that the steam generator
replacement can be accomplished within financial parameters established before
replacement was a consideration, and the Company estimates that its share of the
replacement costs (in 1995 dollars and including installation and replacement
power costs) will be between $30 million and $50 million, most of which will be
incurred after the year 2000. The Company expects that the replacement would be
performed in conjunction with a normal refueling outage in order to limit
incremental outage time to approximately 50 days. Based on the latest available
data, the Company estimates that the Unit 1 and Unit 3 steam generators should
operate for their designed life of 40 years (until 2025 and 2027, respectively),
although the Company will continue its normal periodic assessment of these steam
generators.
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.
On June 9, 1995, Central and South West Corporation filed with the bankruptcy
court a revocation of the previously confirmed plan whereby, among other things,
certain issues, including EPEC allegations against the Company regarding the
1989-90 Palo Verde outages, would have been resolved, and EPEC would have
assumed the joint facilities operating agreements. The Company does not expect
that the revocation of the plan will have a material adverse effect on its
operations or financial position.
<PAGE>
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, six-month and twelve-month periods ended June 30, 1995 and 1994:
Periods ended June 30
(Thousands of Dollars)
Three Months Six Months Twelve Months
------------------- ------------------- ----------------------
1995 1994 1995 1994 1995 1994
------------------- ------------------- ----------------------
Operating
revenues $380,178 $397,156 $717,146 $743,205 $1,600,109 $1,603,857
Earnings for
common stock $ 48,676 $ 58,879 $ 81,701 $ 89,837 $ 210,076 $ 216,390
Operating Results - Three-month period ended June 30, 1995 compared to
-----------------------------------------------------------------------
three-month period ended June 30, 1994
--------------------------------------
Earnings decreased in the three-month period ended June 30, 1995
primarily due to the reversal in 1994 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), lower revenues and the absence of
non-cash accretion income and revenue refund reversals related to a 1991 rate
settlement (see Notes 1k and 1f of Notes to Financial Statements in Part II,
Item 8 of the 1994 10-K). Operating revenues were lower primarily due to milder
weather and a retail rate reduction which became effective June 1, 1994.
Partially offsetting these negative factors were lower operations and
maintenance expenses, lower fuel costs, customer growth, accelerated investment
tax credit amortization, and lower preferred stock dividends. Operations and
maintenance expenses decreased due to severance costs incurred in 1994, lower
fossil plant overhaul costs, and improved nuclear operations. Fuel expense was
down due largely to lower fuel prices and lower average fuel costs resulting
from increased nuclear generation. The accelerated investment tax credit
amortization was a result of the 1994 rate settlement and is reflected as a
decrease to income tax expense. Preferred stock dividends decreased due to less
preferred stock outstanding.
Operating Results - Six-month period ended June 30, 1995 compared to
-----------------------------------------------------------------------
six-month period ended June 30, 1994
------------------------------------
Earnings decreased in the six-month period ended June 30, 1995
primarily due to the absence of non-cash accretion income and revenue refund
reversals related to a 1991 rate settlement (see Notes 1k and 1f of Notes to
Financial Statements in Part II, Item 8 of the 1994 10-K), lower revenues, and
the reversal in 1994 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). Revenues were lower primarily due to milder weather and a
retail rate reduction which became effective June 1, 1994. Partially offsetting
these negative factors were customer growth, lower fuel costs, lower operations
and maintenance expenses, accelerated investment tax credit amortization, a gain
recognized on the sale of a small subsidiary, and lower preferred stock
dividends. Fuel expense was down due largely to lower fuel prices and lower
average fuel costs resulting from increased nuclear generation. Operations and
maintenance expenses decreased due to improved nuclear operations, severance
costs incurred in 1994 and lower fossil plant overhaul costs. The accelerated
investment tax credit amortization was a result of the 1994 rate settlement and
is reflected as a decrease to income tax expense. Preferred stock dividends
decreased due to less preferred stock outstanding.
Operating Results - Twelve-month period ended June 30, 1995 compared to
-----------------------------------------------------------------------
twelve-month period ended June 30, 1994
---------------------------------------
Earnings decreased in the twelve-month period ended June 30, 1995
primarily due to the absence of non-cash accretion income and revenue refund
reversals related to a 1991 rate settlement (see Notes 1k and 1f of Notes to
Financial Statements in Part II, Item 8 of the 1994 10-K), the effects on
revenue of 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),
the reversal in 1994 of certain previously-recorded depreciation related to Palo
Verde and increased depreciation expense. Depreciation expense was up primarily
due to higher plant balances and higher depreciation rates. Partially offsetting
these negative factors were customer growth, lower fuel costs, lower operations
and maintenance expenses, warmer weather in the second half of 1994, lower
preferred stock dividends, and accelerated investment tax credit amortization.
Fuel expense was down due largely to lower average fuel costs resulting from
increased nuclear generation and lower fuel prices. Operations and maintenance
expenses decreased due to improved nuclear operations and lower fossil plant
overhaul costs. Preferred stock dividends decreased due to less preferred stock
outstanding. The accelerated investment tax credit amortization was a result of
the 1994 rate settlement and is reflected as a decrease to income tax expense.
Other Income
------------
Other income reflects accounting practices required for regulated
public utilities and represents a composite of cash and non-cash items,
including AFUDC and accretion income on Palo Verde Unit 3, which the Company
completed recording in May 1994. See Note 1k of Notes to Financial Statements in
Part II, Item 8 of the 1994 10-K. For the six months ended June 30, 1995, other
income included a gain of about $5 million on the sale of a small subsidiary.
Included in other income for the three months ended June 30, 1994, was 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.
Liquidity and Capital Resources
-------------------------------
For the six months ended June 30, 1995, the Company incurred
approximately $129 million in construction expenditures, accounting for
approximately 45% 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 $288 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 $10 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 approximately $9 million of its
First Mortgage Bonds, 9 1/2% Series due 2021 (the "9 1/2% Bonds"), and (v)
redeemed on May 1, 1995, $50 million of its First Mortgage Bonds, 13 1/4% Series
due 2007.
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
$116 million, $4 million, and $164 million for the years 1995, 1996, and 1997,
respectively. During the first six months of 1995, the Company refunded
approximately $108 million (93%) 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 June 30, 1995, and adjusting for the (i)
incurrence of approximately $3.5 million of long-term debt in connection with a
tax-exempt financing and (ii) repurchase of approximately $5.5 million of the 9
1/2% Bonds, the Company estimates that the mortgage bond indenture and the
articles of incorporation would have allowed the Company to issue up to
approximately $1.454 billion and $862 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.
The 1994 rate settlement provided for a study by the Company and the
ACC staff to develop new procedures to address market conditions and increasing
competition in the electric utility industry. The Company presently anticipates
making its recommendations in late 1995. A separate ACC proceeding on
competition was opened by the ACC in mid-1994 and is ongoing.
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.
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 4. Submission of Matters to a Vote of Security-Holders
--------------------------------------------------------------
At the Annual Meeting of Shareholders held on May 16, 1995, the
shareholders elected all of its directors who will serve for the ensuing year
or until their successors are elected or qualified, as follows:
Votes
Against Broker
and Non-
Director Votes For Withheld Abstentions Votes
-------- --------- -------- ----------- -----
Kenneth M. Carr 76,074,555 56,772 N/A N/A
O. Mark De Michele 76,090,345 43,087 N/A N/A
Martha O. Hesse 76,091,080 42,497 N/A N/A
Marrianne M. Jennings 76,080,601 51,414 N/A N/A
Robert G. Matlock 76,090,365 43,371 N/A N/A
Jaron B. Norberg 76,092,754 41,113 N/A N/A
John R. Norton III 76,088,845 44,112 N/A N/A
William J. Post 76,093,530 40,540 N/A N/A
Donald M. Riley 76,093,319 40,709 N/A N/A
Henry B. Sargent 76,092,261 41,603 N/A N/A
Wilma W. Schwada 76,088,137 45,001 N/A N/A
Verne D. Seidel 76,083,599 48,782 N/A N/A
Richard Snell 76,078,701 41,480 N/A N/A
Dianne C. Walker 76,085,329 48,344 N/A N/A
Ben F. Williams, Jr. 76,090,968 42,944 N/A N/A
Thomas G. Woods, Jr. 76,088,592 44,667 N/A N/A
ITEM 5. Other Information
------------------------------
Palo Verde Nuclear Generating Station
-------------------------------------
See Note 7 of Notes to Condensed Financial Statements in Part I, Item 1 of
this report for a discussion of issues regarding the Palo Verde steam
generators.
As previously reported, in August and September 1994, Administrative Law
Judges recommended to the Secretary of Labor that the settlement agreement
between the Company and a former contract employee be approved. See "Palo Verde
Nuclear Generating Station-Department of Labor Matter" in Part I, Item 1 of the
1994 10-K. The settlement agreement was approved by the Secretary of Labor in
June 1995.
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.
Arizona Corporation Commission Petition
---------------------------------------
As previously reported, in May 1990, the ACC filed a petition with the SEC
requesting the SEC to revoke or modify Pinnacle West's exemption under the 1935
Act. See "Arizona Corporation Commission Petition" in Part I, Item 1 of the 1994
10-K. On June 20, 1995, the SEC issued a Report on the Regulation of Public
Utility Holding Companies in which, as its preferred option, the SEC recommended
to the Congress conditional repeal of the 1935 Act, with an adequate transition
period. The SEC further recommended that legislation repealing the 1935 Act
should include provision for state access to books and records of all companies
in the holding company system, and for federal audit authority and oversight of
affiliate transactions. The Company cannot predict what action, if any, the
Congress may take with respect to the SEC's recommendation.
Navajo Nation
-------------
In July 1995, the Tribal Council of the Navajo Nation approved The Navajo
Nation Air Pollution Prevention and Control Act. Pursuant to this Act, The
Navajo Nation Environmental Protection Agency is authorized to promulgate
regulations which will regulate air emissions, including those from the Four
Corners Power Plant; however, until NNEPA does so, the Company cannot predict
what impact, if any, the regulations will have on its operations or financial
position.
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
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1995, and the period ended August 9,
1995, the Company did not file any reports on Form 8-K.
<PAGE>
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: August 9, 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
August 8, 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 June 30,
1995 and 1994, as indicated in our report dated August 8, 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 June 30, 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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PUBLIC UTILITY COMPANIES AND PUBLIC UTILITY HOLDING COMPANIES
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FISCAL YEAR ENDED DECEMBER 31, 1995
FOR PERIOD JANUARY 1, 1995 THROUGH JUNE 30, 1995
SIX MONTHS ENDED
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