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, 1997
------------------------
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
------------
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
- --------------------------------------------------------------------------------
(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 15, 1997: 71,264,947
<PAGE>
Glossary
--------
ACC - Arizona Corporation Commission
ACC Staff - Staff of the Arizona Corporation Commission
Company - Arizona Public Service Company
FERC - Federal Energy Regulatory Commission
ITC - Investment tax credit
1996 10-K - Arizona Public Service Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1996
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
Rules - Rules adopted by the ACC for the introduction of retail electric
competition in Arizona
SFAS No. 71 - Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation"
<PAGE>
-2-
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ----------------------------
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------------------------------------
1997 1996
--------------------------- ----------------------------
(Thousands of Dollars)
<S> <C> <C>
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 379,021 $ 345,261
--------------------------- ----------------------------
FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 51,122 42,334
Purchased power . . . . . . . . . . . . . . . . . . . . 34,347 13,938
--------------------------- ----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 85,469 56,272
--------------------------- ----------------------------
OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 293,552 288,989
--------------------------- ----------------------------
OTHER OPERATING EXPENSES:
Operations and maintenance excluding fuel expenses . . . 88,016 87,743
Depreciation and amortization . . . . . . . . . . . . . 92,015 58,386
Income taxes . . . . . . . . . . . . . . . . . . . . . . 22,292 31,359
Other taxes . . . . . . . . . . . . . . . . . . . . . . 29,790 33,979
--------------------------- ----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 232,113 211,467
--------------------------- ----------------------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 61,439 77,522
--------------------------- ----------------------------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . . -- 1,675
Other - net . . . . . . . . . . . . . . . . . . . . . . (2,209) (291)
Income taxes . . . . . . . . . . . . . . . . . . . . . . 4,340 5,650
--------------------------- ----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 2,131 7,034
--------------------------- ----------------------------
INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 63,570 84,556
--------------------------- ----------------------------
INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 34,429 37,400
Interest on short-term borrowings . . . . . . . . . . . 2,328 2,670
Debt discount, premium and expense . . . . . . . . . . . 2,002 2,117
Capitalized interest . . . . . . . . . . . . . . . . . . (3,834) (3,237)
--------------------------- ----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 34,925 38,950
--------------------------- ----------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 28,645 45,606
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 3,626 4,477
--------------------------- ----------------------------
EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 25,019 $ 41,129
=========================== ============================
</TABLE>
See Notes to Condensed Financial Statements.
<PAGE>
-3-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Twelve Months
Ended March 31,
------------------------------------------------------------
1997 1996
--------------------------- ----------------------------
(Thousands of Dollars)
<S> <C> <C>
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 1,752,032 $ 1,623,245
--------------------------- ----------------------------
FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 239,181 204,552
Purchased power . . . . . . . . . . . . . . . . . . . . 115,539 66,598
--------------------------- ----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 354,720 271,150
--------------------------- ----------------------------
OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 1,397,312 1,352,095
--------------------------- ----------------------------
OTHER OPERATING EXPENSES:
Operations and maintenance excluding fuel expenses . . . 430,987 397,125
Depreciation and amortization . . . . . . . . . . . . . 330,839 240,058
Income taxes . . . . . . . . . . . . . . . . . . . . . . 169,446 188,602
Other taxes . . . . . . . . . . . . . . . . . . . . . . 116,915 140,248
--------------------------- ----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 1,048,187 966,033
--------------------------- ----------------------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 349,125 386,062
--------------------------- ----------------------------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . . 3,534 5,471
Other - net . . . . . . . . . . . . . . . . . . . . . . (17,462) (22,107)
Income taxes . . . . . . . . . . . . . . . . . . . . . . 44,242 41,526
--------------------------- ----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 30,314 24,890
--------------------------- ----------------------------
INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 379,439 410,952
--------------------------- ----------------------------
INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 144,695 155,560
Interest on short-term borrowings . . . . . . . . . . . 10,279 9,589
Debt discount, premium and expense . . . . . . . . . . . 8,061 8,765
Capitalized interest . . . . . . . . . . . . . . . . . . (10,106) (10,306)
--------------------------- ----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 152,929 163,608
--------------------------- ----------------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 226,510 247,344
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 16,241 18,804
--------------------------- ----------------------------
EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 210,269 $ 228,540
=========================== ============================
</TABLE>
See Notes to Condensed Financial Statements.
<PAGE>
-4-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
ASSETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------------ ------------------------
(Thousands of Dollars)
<S> <C> <C>
UTILITY PLANT:
Electric plant in service and held for future use . . . $ 6,830,092 $ 6,803,211
Less accumulated depreciation and amortization . . . . . 2,486,345 2,426,143
--------------------------- ----------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 4,343,747 4,377,068
Construction work in progress . . . . . . . . . . . . . 251,753 226,935
Nuclear fuel, net of amortization . . . . . . . . . . . 60,326 51,137
--------------------------- ----------------------------
Utility plant - net . . . . . . . . . . . . . . . . . 4,655,826 4,655,140
--------------------------- ----------------------------
INVESTMENTS AND OTHER ASSETS :. . . . . . . . . . . . . . . 117,712 113,666
--------------------------- ----------------------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . 26,192 12,521
Accounts receivable:
Service customers . . . . . . . . . . . . . . . . . . 107,200 111,715
Other . . . . . . . . . . . . . . . . . . . . . . . . 29,468 49,898
Allowance for doubtful accounts . . . . . . . . . . . (1,329) (1,685)
Accrued utility revenues . . . . . . . . . . . . . . . . 49,226 55,470
Materials and supplies, at average cost . . . . . . . . 73,213 74,120
Fossil fuel, at average cost . . . . . . . . . . . . . 12,639 13,928
Deferred income taxes . . . . . . . . . . . . . . . . . 8,424 8,424
Other . . . . . . . . . . . . . . . . . . . . . . . . . 24,791 22,767
--------------------------- ----------------------------
Total current assets . . . . . . . . . . . . . . . . 329,824 347,158
--------------------------- ----------------------------
DEFERRED DEBITS:
Regulatory asset for income taxes . . . . . . . . . . . 502,356 516,722
Rate synchronization cost deferrals . . . . . . . . . . 400,279 414,082
Unamortized costs of reacquired debt . . . . . . . . . . 70,237 69,554
Unamortized debt issue costs . . . . . . . . . . . . . . 15,950 16,692
Other . . . . . . . . . . . . . . . . . . . . . . . . . 278,223 290,208
--------------------------- ----------------------------
Total deferred debits . . . . . . . . . . . . . . . . 1,267,045 1,307,258
--------------------------- ----------------------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 6,370,407 $ 6,423,222
=========================== ============================
</TABLE>
See Notes to Condensed Financial Statements.
<PAGE>
-5-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
LIABILITIES
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------------------------- ----------------------------
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION:
Common stock . . . . . . . . . . . . . . . . . . . . . . $ 178,162 $ 178,162
Premiums and expense - net . . . . . . . . . . . . . . . 1,091,780 1,091,122
Retained earnings . . . . . . . . . . . . . . . . . . . 442,622 460,106
--------------------------- ----------------------------
Common stock equity . . . . . . . . . . . . . . . . . 1,712,564 1,729,390
Non-redeemable preferred stock . . . . . . . . . . . . . 149,387 165,673
Redeemable preferred stock . . . . . . . . . . . . . . . 43,000 53,000
Long-term debt less current maturities . . . . . . . . . 1,889,455 2,029,482
--------------------------- ----------------------------
Total capitalization . . . . . . . . . . . . . . . . 3,794,406 3,977,545
--------------------------- ----------------------------
CURRENT LIABILITIES:
Commercial paper . . . . . . . . . . . . . . . . . . . . 216,300 16,900
Current maturities of long-term debt . . . . . . . . . . 103,780 153,780
Accounts payable . . . . . . . . . . . . . . . . . . . . 112,857 174,394
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 134,319 86,327
Accrued interest . . . . . . . . . . . . . . . . . . . . 24,633 39,115
Customer deposits . . . . . . . . . . . . . . . . . . . 32,089 32,137
Other . . . . . . . . . . . . . . . . . . . . . . . . . 25,327 21,150
--------------------------- ----------------------------
Total current liabilities . . . . . . . . . . . . . . 649,305 523,803
--------------------------- ----------------------------
DEFERRED CREDITS AND OTHER:
Deferred income taxes . . . . . . . . . . . . . . . . . 1,404,152 1,414,242
Deferred investment tax credit . . . . . . . . . . . . . 84,343 87,723
Unamortized gain - sale of utility plant . . . . . . . . 85,795 86,939
Customer advances for construction . . . . . . . . . . . 25,697 24,044
Other . . . . . . . . . . . . . . . . . . . . . . . . . 326,709 308,926
--------------------------- ----------------------------
Total deferred credits and other . . . . . . . . . . 1,926,696 1,921,874
--------------------------- ----------------------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6 and 7)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 6,370,407 $ 6,423,222
=========================== ============================
</TABLE>
See Notes to Condensed Financial Statements.
<PAGE>
-6-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------------------------------------
1997 1996
--------------------------- ----------------------------
(Thousands of Dollars)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 28,645 $ 45,606
Items not requiring cash:
Depreciation and amortization . . . . . . . . . . . . 92,015 58,386
Nuclear fuel amortization . . . . . . . . . . . . . . 7,523 8,357
AFUDC - equity . . . . . . . . . . . . . . . . . . . . -- (1,675)
Deferred income taxes - net . . . . . . . . . . . . . (8,948) 1,176
Deferred investment tax credit - net . . . . . . . . . (3,380) (5,455)
Changes in certain current assets and liabilities:
Accounts receivable - net . . . . . . . . . . . . . . 24,589 22,824
Accrued utility revenues . . . . . . . . . . . . . . . 6,244 9,429
Materials, supplies and fossil fuel . . . . . . . . . 2,196 1,049
Other current assets . . . . . . . . . . . . . . . . . (2,024) 427
Accounts payable . . . . . . . . . . . . . . . . . . . (48,355) (29,941)
Accrued taxes . . . . . . . . . . . . . . . . . . . . 47,992 63,647
Accrued interest . . . . . . . . . . . . . . . . . . . (14,482) (12,119)
Other current liabilities . . . . . . . . . . . . . . 4,313 9,617
Other - net . . . . . . . . . . . . . . . . . . . . . . 28,385 12,608
--------------------------- ----------------------------
Net cash flow provided by operating activities . . . 164,713 183,936
--------------------------- ----------------------------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . (77,129) (60,138)
Sale of Property . . . . . . . . . . . . . . . . . . . . -- 2,824
Capitalized interest . . . . . . . . . . . . . . . . . . (3,834) (3,237)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (4,046) (6,613)
--------------------------- ----------------------------
Net cash flow used for investing activities. . . . . (85,009) (67,164)
--------------------------- ----------------------------
Cash Flows from Financing Activities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . -- 25,006
Short-term borrowings - net . . . . . . . . . . . . . . 199,400 (18,200)
Dividends paid on common stock . . . . . . . . . . . . . (42,500) (42,500)
Dividends paid on preferred stock . . . . . . . . . . . (3,897) (4,778)
Repayment of preferred stock . . . . . . . . . . . . . . (25,980) (23,410)
Repayment and reacquisition of long-term debt . . . . . (193,056) (50,979)
--------------------------- ----------------------------
Net cash flow used for financing activities . . . . (66,033) (114,861)
--------------------------- ----------------------------
Net increase in cash and cash equivalents . . . . . . . . 13,671 1,911
Cash and cash equivalents at beginning of period . . . . . 12,521 18,389
--------------------------- ----------------------------
Cash and cash equivalents at end of period . . . . . . . . $ 26,192 $ 20,300
=========================== ============================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) . . . . . . $ 48,051 $ 48,444
Income taxes . . . . . . . . . . . . . . . . . . . . . $ 9,814 $ --
</TABLE>
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 March
31, 1997, the results of operations for the three months and twelve months ended
March 31, 1997 and 1996, and the cash flows for the three months ended March 31,
1997 and 1996. 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 1996
10-K.
2. The Company's operations are subject to seasonal fluctuations, with
variations in energy usage by customers occurring 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.
4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for
changes in capitalization for the three months ended March 31, 1997.
5. Regulatory Matters
Electric Industry Restructuring
State The ACC has been conducting an ongoing investigation into the
restructuring of the Arizona electric industry. In December 1996, the ACC
adopted rules that provide a framework for the introduction of retail electric
competition. The ACC has ordered that reliability, stranded cost recovery, the
phase-in process, and bundled, unbundled and metering services, as well as legal
issues, will require additional consideration and will be addressed through
workshops and working groups which will issue recommendations to the ACC during
1997. The Rules include the following major provisions:
o The Rules are intended to apply to virtually all of the Arizona electric
utilities regulated by the ACC, including the Company.
o Each affected utility would be required to make available at least 20
percent of its 1995 system retail peak demand for competitive generation
supply to all customer classes not later than January 1, 1999; at least 50
percent not later than
<PAGE>
January 1, 2001; and all of its retail demand not later than January 1,
2003.
o Electric service providers that obtain a Certificate of Convenience and
Necessity (CC&N) from the ACC would be allowed to supply, market, and/or
broker specified electric services at retail. These services would include
electric generation but exclude electric transmission and distribution.
o On or before December 31, 1997, each affected utility is required to file
with the ACC proposed tariffs for bundled service and unbundled service.
Bundled service means electric service elements (i.e., generation,
transmission, distribution, and ancillary services) provided as a package
to consumers within an affected utility's current service area. Unbundled
service means electric service elements provided and priced separately.
o The Rules indicate that the ACC will allow recovery of unmitigated stranded
costs. Each affected utility would be required to file with the ACC
estimates of unmitigated stranded costs. The ACC would then, after hearing
and consideration of various factors, determine the magnitude of stranded
cost and appropriate stranded cost recovery mechanisms and charges.
The Company continues to focus on working with the ACC to bring competitive
benefits to Arizona but believes that certain provisions of the Rules are
deficient. In February 1997, the Company filed lawsuits to protect its legal
rights regarding the Rules.
A joint legislative committee has been appointed to study electric utility
industry restructuring issues and report back to the Arizona legislature by the
end of 1997. The Company believes that legislation will ultimately be required
before significant implementation of the Rules can lawfully occur.
Until it has been further determined how competition will be implemented in
Arizona, the Company cannot accurately predict the impact of full retail
competition on its financial position or results of operations.
Federal The Energy Policy Act of 1992 and recent rulemakings by FERC have
promoted increased competition in the wholesale electric power markets. The
Company does not expect these rulemakings to have a material impact on its
financial statements.
Several electric utility reform bills have been introduced during the current
congressional session, which as currently written, would allow consumers to
choose their electric supplier by 2000 or 2003. These bills, other bills that
are expected to be introduced, and ongoing discussions at the federal level
suggest
<PAGE>
a wide range of opinion that will need to be narrowed before any substantial
restructuring of the electric utility industry can occur.
Regulatory Accounting The Company prepares its financial statements in
accordance with the provisions of 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. The Company's existing
regulatory orders and current regulatory environment support its accounting
practices related to regulatory assets, which amounted to approximately $1.1
billion at March 31, 1997. In accordance with the 1996 regulatory agreement (see
below), the ACC accelerated the amortization of substantially all of the
Company's regulatory assets over an eight-year period. If rate recovery of these
assets is no longer probable, whether due to competition or regulatory action,
the Company would no longer be able to apply the provisions of SFAS No. 71 to
all or some part of its operations, which could have a material impact on the
Company's financial statements.
1996 Regulatory Agreement
In April 1996, the ACC approved a regulatory agreement between the Company and
the ACC Staff. The major provisions of this agreement are:
o An annual rate reduction of approximately $48.5 million ($29 million after
income taxes), or 3.4% on average for all customers except certain contract
customers, effective July 1, 1996.
o Recovery of substantially all of the Company's present regulatory assets
through accelerated amortization over an eight-year period beginning July
1, 1996, increasing annual amortization by approximately $120 million ($72
million after income taxes).
o A formula for sharing future cost savings between customers and
shareholders (price reduction formula) referencing a return on equity (as
defined) of 11.25%.
o A moratorium on filing for permanent rate changes prior to July 2, 1999,
except under the price reduction formula and under certain other limited
circumstances.
o Infusion of $200 million of common equity into the Company by Pinnacle
West, in annual payments of $50 million starting in 1996.
Pursuant to the price reduction formula, in May 1997, the ACC approved an annual
retail rate reduction of approximately $17.6 million ($11 million after income
taxes), or 1.2%, to become effective July 1, 1997. An amendment to the proposed
order, approved by two of the three commissioners, created some confusion as to
the status of the 1996 regulatory agreement. As interpreted by the Chairman of
the ACC in a concurring opinion, his vote in favor of the amendment was to
authorize the ACC Staff to determine how property taxes are recognized and
accounted for under the 1996 regulatory agreement. The Company cannot currently
predict the outcome of this matter.
<PAGE>
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. If losses at any
nuclear power plant covered by the programs exceed the accumulated funds, the
Company could be assessed retrospective premium adjustments. The maximum
assessment per reactor under the 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 $2.75 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 and these analyses indicate that it will
be economically desirable for the Company to replace the Unit 2 steam generators
between 2003 and 2008. The Company estimates that its share of the replacement
costs (in 1997 dollars and including installation and replacement power costs)
will be approximately $50 million, most of which will be incurred after the year
2000. Based on the latest available data, the Company estimates that the Unit 1
and Unit 3 steam generators should operate for the license periods (until 2025
and 2027, respectively), although the Company will continue its normal periodic
assessment of these steam generators.
<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 and twelve-month periods ended March 31, 1997 and 1996:
Periods ended March 31
(Thousands of Dollars)
Three Months Twelve Months
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Operating revenues $ 379,021 $ 345,261 $1,752,032 $1,623,245
Earnings for
common stock $ 25,019 $ 41,129 $ 210,269 $ 228,540
Operating Results - Three-month period ended March 31, 1997 compared
-----------------------------------------------------------------------
with three-month period ended March 31, 1996
--------------------------------------------
Earnings decreased in the three-month period ended March 31, 1997,
primarily due to the accelerated amortization of regulatory assets and a retail
price reduction, both of which were part of a regulatory agreement which became
effective July 1, 1996. See Note 5 of Notes to Condensed Financial Statements.
Partially offsetting these negative factors were increased operating revenues
(net of related fuel expenses), lower property taxes and lower interest expense.
Operating revenues (net of related fuel expenses) were higher primarily
due to retail customer growth and weather effects, partially offset by the 1996
retail price reduction. Revenues from sales for resale increased $22 million,
accompanied by significant increases in related fuel expenses, as a result of
increased activity in competitive bulk power markets. These bulk power
activities did not result in a significant variance in earnings due to market
pressures on prices. Property taxes decreased due to a 1996 change in tax law.
Interest expense decreased due to lower amounts of debt outstanding and lower
average interest rates.
Operating Results - Twelve-month period ended March 31, 1997 compared
-----------------------------------------------------------------------
with twelve-month period ended March 31, 1996
---------------------------------------------
Earnings decreased in the twelve-month period ended March 31, 1997,
primarily due to the accelerated amortization of regulatory assets, a retail
price reduction, a $31.7 million pretax charge in the fourth quarter of 1996 for
a voluntary
<PAGE>
severance program and an increase in fuel expenses.
The accelerated regulatory asset amortization and the retail price
reduction were part of a regulatory agreement which became effective July 1,
1996. See Note 5 of Notes to Condensed Financial Statements. Fuel expenses were
higher primarily due to increased retail and wholesale sales volumes, higher
natural gas costs and a less favorable mix of generation and purchased power,
particularly during a regional power outage in August 1996.
Partially offsetting these negative factors were increased operating
revenues (net of related fuel expenses), lower property taxes, the recognition
of $11 million of income tax benefits associated with capital loss carryforwards
and lower interest expense. The twelve-month comparison was also positively
impacted by $21 million of pretax asset write-downs in the twelve months ended
March 31, 1996. Operating revenues (net of related fuel expenses) were higher
due to retail customer growth, warmer weather and higher residential usage,
partially offset by the retail price reduction. Revenues from sales for resale
increased $35 million, accompanied by significant increases in related fuel
expenses, as a result of increased activity in competitive bulk power markets.
These bulk power activities did not result in a significant variance in earnings
due to market pressures on prices. Property taxes decreased due to a 1996 change
in tax law. Interest expense decreased due to lower average interest rates and
lower amounts of debt outstanding.
Other Income
------------
As part of a 1994 rate settlement agreement with the ACC, the Company
accelerated amortization of substantially all deferred ITCs over a five-year
period beginning in 1995, resulting in a decrease in annual income tax expense
of approximately $21 million.
Liquidity and Capital Resources
- -------------------------------
For the three months ended March 31, 1997, the Company incurred
approximately $66 million in capital expenditures, which is approximately 22% of
the most recently estimated 1997 capital expenditures. The Company estimates
total capital expenditures for the years 1997, 1998, and 1999 to be
approximately $296 million, $283 million, and $262 million, respectively. These
amounts include about $30 million each year for nuclear fuel expenditures.
Required and optional redemptions of preferred stock and repayment of
long-term debt, including premiums thereon, and payments for a capitalized lease
obligation are expected to total approximately $263 million, $114 million, and
$114 million for the years 1997, 1998, and 1999, respectively. During the three
months ended March 31, 1997, the Company redeemed approximately
<PAGE>
$193 million of its long-term debt and approximately $26 million of its
preferred stock. As a result of the 1996 regulatory agreement (see Note 5 of
Notes to Condensed Financial Statements), Pinnacle West invested $50 million in
the Company in 1996 and will invest similar amounts annually in 1997 through
1999.
Although provisions in the Company's bond indenture, articles of
incorporation, and financing orders from the ACC establish maximum amounts of
additional first mortgage bonds and preferred stock, management does not expect
any of these restrictions to limit the Company's ability to meet its capital
requirements.
Current Issues
- --------------
The Company's ability to maintain and improve its current level of
earnings will depend on several factors. As the electric industry becomes more
competitive, the Company's ability to reduce costs and increase productivity and
resource utilization will be important factors in maintaining a price structure
that is both attractive to customers and profitable to the Company. Other
important factors that could affect the Company's future earnings levels and any
forward-looking statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" include regulatory
developments; competitive developments; regional economic conditions; the cost
of debt and equity capital; regulatory, tax and environmental legislation;
weather variations affecting customer usage; and technological developments in
the electricity industry.
Competition
-----------
See Note 5 of Notes to Condensed Financial Statements in Part I, Item 1
of this report for discussions of competitive developments and regulatory
accounting.
Rate Matters
------------
See Note 5 of Notes to Condensed Financial Statements in Part I, Item 1
of this report for a discussion of a proposed rate reduction.
<PAGE>
PART II - OTHER INFORMATION
---------------------------
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.
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.
Competition and Electric Industry Restructuring
-----------------------------------------------
See Note 5 of Notes to Condensed 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.
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1997, and the period ended May 15,
1997, the Company filed the following report on Form 8-K:
Report dated April 7, 1997 comprised of Exhibits to the Company's
Registration Statements (Registration Nos. 33-55473, 33-64455 and 333-15379)
relating to the Company's offering of $50 million of its Senior Notes.
<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: May 15, 1997 By: George A. Schreiber, Jr.
---------------- -------------------------------------
George A. Schreiber, Jr. Executive
Vice President and Chief Financial
Officer (Principal Financial Officer
and Officer Duly Authorized to sign
this Report)
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
PUBLIC UTILITY COMPANIES AND PUBLIC UTILITY HOLDING
COMPANIES
(THOUSANDS OF DOLLARS)
FISCAL YEAR ENDED DECEMBER 31, 1997
FOR PERIOD JANUARY 1, 1997 THROUGH MARCH 31, 1997
THREE MONTHS ENDED
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4655826
<OTHER-PROPERTY-AND-INVEST> 117712
<TOTAL-CURRENT-ASSETS> 329824
<TOTAL-DEFERRED-CHARGES> 1267045
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6370407
<COMMON> 178162
<CAPITAL-SURPLUS-PAID-IN> 1091780
<RETAINED-EARNINGS> 442622
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1712564
43000
149387
<LONG-TERM-DEBT-NET> 1889455
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 216300
<LONG-TERM-DEBT-CURRENT-PORT> 103780
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2255921
<TOT-CAPITALIZATION-AND-LIAB> 6370407
<GROSS-OPERATING-REVENUE> 379021
<INCOME-TAX-EXPENSE> 22292
<OTHER-OPERATING-EXPENSES> 295290
<TOTAL-OPERATING-EXPENSES> 317582
<OPERATING-INCOME-LOSS> 61439
<OTHER-INCOME-NET> 2131
<INCOME-BEFORE-INTEREST-EXPEN> 63570
<TOTAL-INTEREST-EXPENSE> 34925
<NET-INCOME> 28645
3626
<EARNINGS-AVAILABLE-FOR-COMM> 25019
<COMMON-STOCK-DIVIDENDS> 42500
<TOTAL-INTEREST-ON-BONDS> 31963
<CASH-FLOW-OPERATIONS> 164713
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
