FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
-------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ -------------------
Commission file number 1-8962
PINNACLE WEST CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Arizona 86-0512431
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 E. Van Buren St., P. O. Box 52132, Phoenix, Arizona 85072-2132
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 602-379-2500
----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of common stock, no par value,
outstanding as November 1, 1994 87,400,952
<PAGE>
Glossary
ACC - Arizona Corporation Commission
ACC Order - Final order of the ACC dated June 1, 1994 approving the 1994
Settlement Agreement between APS and the ACC staff dated May 27,
1994
ACC Staff - Staff of the Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
APS - Arizona Public Service Company
Company - Pinnacle West Capital Corporation
CSW - Central and South West Corporation
El Dorado - El Dorado Investment Company
EPA - United States Environmental Protection Agency
EPEC - El Paso Electric Company
Four Corners - Four Corners Power Plant
ITCs - Investment tax credits
June 10-Q - Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1994
1991 Settlement - December 1991 retail rate case settlement
1993 10-K - Pinnacle West Capital Corporation Annual Report on Form 10-K
for the fiscal year ended December 31, 1993
Palo Verde - Palo Verde Nuclear Generating Station
SunCor - SunCor Development Company
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
September 30,
1994 1993
------------ ------------
Operating Revenues
Electric $ 570,427 $ 524,483
Real estate 13,473 10,093
------------ ------------
Total 583,900 534,576
------------ ------------
Fuel Expenses
Fuel for electric generation 70,035 67,171
Purchased power 25,532 28,343
------------ ------------
Total 95,567 95,514
------------ ------------
Operating Expenses
Utility operations and maintenance 102,944 101,157
Real estate operations 15,272 11,885
Depreciation and amortization 59,132 56,064
Taxes other than income taxes 65,549 62,002
------------ ------------
Total 242,897 231,108
------------ ------------
Operating Income 245,436 207,954
------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction 1,014 684
Palo Verde accretion income -- 18,959
Interest on long-term debt (63,021) (60,060)
Other interest (3,918) (5,017)
Allowance for borrowed funds used
during construction 1,401 806
Preferred stock dividend requirements
of APS (5,908) (7,294)
Other-net (2,801) (2,038)
------------ ------------
Total (73,233) (53,960)
------------ ------------
Income From Continuing Operations
Before Income Taxes 172,203 153,994
Income Tax Expense 78,212 67,260
------------ ------------
Net Income $ 93,991 $ 86,734
============ ============
Average Common Shares Outstanding 87,409,343 87,271,521
------------ ------------
Earnings Per Average Common Share Outstanding: $ 1.08 $ 0.99
============ ============
Dividends Declared Per Share $ 0.20 --
============ ============
See Notes to Condensed Consolidated Financial Statements
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended
September 30,
1994 1993
------------ ------------
Operating Revenues
Electric $ 1,353,191 $ 1,303,161
Real estate 38,333 20,169
------------ ------------
Total 1,391,524 1,323,330
------------ ------------
Fuel Expenses
Fuel for electric generation 188,093 177,208
Purchased power 51,899 55,416
------------ ------------
Total 239,992 232,624
------------ ------------
Operating Expenses
Utility operations and maintenance 309,009 286,459
Real estate operations 39,535 23,964
Depreciation and amortization 175,280 167,612
Taxes other than income taxes 176,473 168,227
------------ ------------
Total 700,297 646,262
------------ ------------
Operating Income 451,235 444,444
------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction 2,837 2,094
Palo Verde accretion income 33,596 55,418
Interest on long-term debt (176,587) (185,411)
Other interest (11,882) (12,960)
Allowance for borrowed funds used
during construction 3,918 2,772
Preferred stock dividend requirements
of APS (20,390) (22,831)
Other-net 17,524 (1,586)
------------ ------------
Total (150,984) (162,504)
------------ ------------
Income From Continuing Operations
Before Income Taxes 300,251 281,940
Income Tax Expense 135,939 128,833
------------ ------------
Income From Continuing Operations 164,312 153,107
Cumulative Effect of Change in Accounting
for Income Taxes -- 19,252
------------ ------------
Net Income $ 164,312 $ 172,359
============ ============
Average Common Shares Outstanding 87,415,344 87,208,428
Earnings Per Average Common Share Outstanding:
Continuing Operations $ 1.88 $ 1.76
Accounting Change -- 0.22
------------ ------------
Total $ 1.88 $ 1.98
============ ============
Dividends Declared Per Share $ 0.60 --
============ ============
See Notes to Condensed Consolidated Financial Statements
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Twelve Months Ended
September 30,
1994 1993
------------ ------------
Operating Revenues
Electric $ 1,736,320 $ 1,701,921
Real estate 50,412 24,539
------------ ------------
Total 1,786,732 1,726,460
------------ ------------
Fuel Expenses
Fuel for electric generation 242,319 237,103
Purchased power 65,595 66,944
------------ ------------
Total 307,914 304,047
------------ ------------
Operating Expenses
Utility operations and maintenance 423,766 394,227
Real estate operations 53,791 30,940
Depreciation and amortization 231,226 222,900
Taxes other than income taxes 230,591 222,535
------------ ------------
Total 939,374 870,602
------------ ------------
Operating Income 539,444 551,811
------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction 3,069 2,776
Palo Verde accretion income 53,058 72,943
Interest on long-term debt (237,137) (248,984)
Other interest (15,427) (16,663)
Allowance for borrowed funds used
during construction 5,299 3,675
Preferred stock dividend requirements
of APS (28,399) (30,756)
Other-net 16,828 (11,380)
------------ ------------
Total (202,709) (228,389)
------------ ------------
Income From Continuing Operations
Before Income Taxes 336,735 323,422
Income Tax Expense 155,552 151,670
------------ ------------
Income From Continuing Operations 181,183 171,752
Income From Discontinued Operations --
Net of Income Tax -- 6,000
Cumulative Effect of Change in Accounting
for Income Taxes -- 19,252
------------ ------------
Net Income $ 181,183 $ 197,004
============ ============
Average Common Shares Outstanding 87,396,659 87,171,924
Earnings Per Average Common Share Outstanding:
Continuing Operations $ 2.07 $ 1.97
Discontinued Operations -- 0.07
Accounting Change -- 0.22
------------ ------------
Total $ 2.07 $ 2.26
============ ============
Dividends Declared Per Share $ 0.80 --
============ ============
See Notes to Condensed Consolidated Financial Statements
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
(Thousands of Dollars)
September 30, December 31,
1994 1993
----------- -----------
Current Assets
Cash and cash equivalents $ 78,686 $ 52,127
Customer and other receivables--net 154,861 126,343
Accrued utility revenues 83,997 60,356
Material and supplies 95,827 96,174
Fossil fuel 24,956 34,220
Deferred income taxes 109,568 100,234
Other current assets 15,811 13,782
----------- -----------
Total current assets 563,706 483,236
----------- -----------
Investments and Other Assets
Real estate investments--net 401,086 402,873
Other assets 136,909 136,074
----------- -----------
Total investments and other assets 537,995 538,947
----------- -----------
Utility Plant
Electric plant in service, including
nuclear fuel 6,586,253 6,462,589
Construction work in progress 176,249 197,556
----------- -----------
Total utility plant 6,762,502 6,660,145
Less accumulated depreciation and
amortization 2,148,916 2,058,895
----------- -----------
Net utility plant 4,613,586 4,601,250
----------- -----------
Deferred Debits
Regulatory asset for income taxes 554,868 585,294
Palo Verde Unit 3 cost deferral 294,877 301,748
Palo Verde Unit 2 cost deferral 173,451 177,998
Other deferred debits 272,651 268,326
----------- -----------
Total deferred debits 1,295,847 1,333,366
----------- -----------
Total Assets $ 7,011,134 $ 6,956,799
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND EQUITY
(Thousands of Dollars)
September 30, December 31,
1994 1993
---------- ----------
Current Liabilities
Accounts payable $ 98,930 $ 97,489
Accrued taxes 180,644 96,303
Accrued interest 50,884 57,674
Short-term borrowings 35,500 148,000
Current maturities of long-term debt 144,154 78,841
Other current liabilities 70,097 60,845
---------- ----------
Total current liabilities 580,209 539,152
---------- ----------
Non-Current Liabilities
Long-term debt less current maturities 2,603,600 2,633,620
Other liabilities 8,308 8,246
---------- ----------
Total non-current liabilities 2,611,908 2,641,866
---------- ----------
Deferred Credits and Other
Deferred income taxes 1,328,089 1,278,673
Deferred investment tax credit 121,396 127,331
Unamortized gain - sale of utility plant 100,749 107,344
Other deferred credits 218,431 221,762
---------- ----------
Total deferred credits and other 1,768,665 1,735,110
---------- ----------
Commitments and Contingencies (Notes 6, 7 and 8)
Minority Interests
Non-redeemable preferred stock of APS 193,561 193,561
---------- ----------
Redeemable preferred stock of APS 95,000 197,610
---------- ----------
Common Stock Equity
Common stock, no par value 1,643,212 1,642,783
Retained earnings 118,579 6,717
---------- ----------
Total common stock equity 1,761,791 1,649,500
---------- ----------
Total Liabilities and Equity $7,011,134 $6,956,799
========== ==========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(THOUSANDS OF DOLLARS)
Nine Months Ended
September 30,
1994 1993
-------- ---------
Cash Flows From Operating Activities
Income from continuing operations before
cumulative effect of accounting change $ 164,312 $ 153,107
Items not requiring cash
Depreciation and amortization 199,585 195,299
Deferred income taxes--net 70,508 105,593
Provision for rate refund (9,308) (16,031)
Palo Verde accretion income (33,596) (55,418)
Other--net (5,180) (1,257)
Changes in current assets and liabilities
Accounts receivable--net (28,518) 14,812
Accrued utility revenues (23,641) (20,472)
Materials, supplies and fossil fuel 9,611 3,191
Other current assets (2,029) (58,689)
Accounts payable 18,019 (13,739)
Accrued taxes 84,341 45,310
Accrued interest (6,790) (7,690)
Other current liabilities (29,880) (9,612)
Additions to real estate (25,418) (18,978)
Sales of real estate 24,765 13,259
Other--net (10,968) 47,514
--------- ---------
Net Cash Flow Provided By Operating Activities 395,813 376,199
--------- ---------
Cash Flows From Investing Activities
Capital expenditures (179,836) (166,671)
Allowance for equity funds used
during construction 2,837 2,094
Other--net (3,982) (444)
--------- ---------
Net Cash Flow Used For Investing Activities (180,981) (165,021)
--------- ---------
Cash Flows From Financing Activities
Issuance of long-term debt 528,668 520,215
Short-term debt--net (112,500) (150,000)
Dividends paid on common stock (52,450) --
Repayment of long-term debt (449,810) (484,909)
Redemption of preferred stock (104,096) (28,040)
Other--net 1,915 359
--------- ---------
Net Cash Flow Used For Financing Activities (188,273) (142,375)
--------- ---------
Net Cash Flow 26,559 68,803
Cash and Cash Equivalents at
Beginning of Period 52,127 87,926
--------- ---------
Cash and Cash Equivalents at
End of Period $ 78,686 $ 156,729
========= =========
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 176,066 $ 190,784
Income taxes $ 26,100 $ 27,324
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements include the accounts of
Pinnacle West and its subsidiaries: APS, SunCor and El Dorado. All significant
intercompany balances have been eliminated. Certain prior-year balances have
been reclassified to conform to the 1994 presentation.
2. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position of
Pinnacle West and its subsidiaries as of September 30, 1994, the results of
their operations for the three months, nine months, and twelve months ended
September 30, 1994 and 1993, and their cash flows for the nine months ended
September 30, 1994 and 1993. It is suggested that these condensed consolidated
financial statements and notes to condensed consolidated financial statements be
read in conjunction with the consolidated financial statements and notes to
consolidated financial statements included in the 1993 10-K.
3. The operations of APS 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, Pinnacle West's consolidated results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year.
4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for
changes in capitalization since December 31, 1993.
5. By order dated June 1, 1994 (the "ACC Order") the ACC approved the terms of a
settlement agreement dated May 27, 1994 between APS and the ACC Staff. The ACC
Order (a) reduced APS' annual retail rates by approximately $38.3 million, or
2.7%, effective June 1, 1994; (b) establishes mandatory spending levels on
renewable resources and demand side management projects that APS will be allowed
to recover through a surcharge which, when netted against the rate reduction
referenced in clause (a), would result in a rate reduction of approximately
2.2%; (c) provides that neither APS nor the ACC Staff will file for a permanent
change to APS' general rates and charges before December 31, 1996, except under
certain circumstances; (d) establishes a cost of service target based on fuel
and operation and maintenance expenses that, if met or exceeded by APS, would
entitle APS to a percentage of the resulting savings if the next general rate
proceeding results in no increase in residential rates; (e) confirms that all
three Palo Verde units are, and in future rate cases will be, included in APS'
rate base, unless there are significant changes in the operating
characteristics, reliability, or efficiency of the units; (f) approves higher
decommissioning funding levels for each of the Palo Verde units; (g) allows APS
to accelerate the amortization of certain ITCs; and (h) allowed APS to record a
one-time depreciation reversal related to Palo Verde (associated with the 1991
Settlement) in the amount of approximately $15.0 million after tax. Because of
the non-cash earnings resulting from the items discussed in clauses (g) and (h)
of this Note 5, APS does not expect its earnings to be significantly affected by
the retail rate reduction resulting from the ACC Order. The description of the
ACC Order in this paragraph is a summary and is qualified in its entirety by the
copy of the ACC Order that is attached as an exhibit to the APS Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1994.
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 industrywide 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 APS' 29.1% interest in the three Palo Verde units, APS'
maximum potential assessment per incident is approximately $69 million, with an
annual payment limitation of $8.73 million. The insureds under this liability
insurance include the Palo Verde participants and "any other person or
organization with respect to his legal responsibility for damage caused by the
nuclear energy hazard."
The Palo Verde participants maintain "all risk" (including nuclear hazards)
insurance for property damage to, and decontamination and decommissioning of,
property at Palo Verde in the aggregate amount of $2.75 billion, a substantial
portion of which must first be applied to stabilization and decontamination. APS
has also secured insurance against portions of any increased cost of generation
or purchased power and business interruption resulting from a sudden and
unforeseen outage of any of the three units. The insurance coverage discussed in
this and the previous paragraph is subject to certain policy conditions and
exclusions.
7. APS owns or leases a 29.1% interest in Palo Verde and owns a 15% interest in
Four Corners Units 4 and 5. The other joint owners of Palo Verde and Four
Corners Units 4 and 5 include El Paso Electric Company ("EPEC"), which is
currently operating under Chapter 11 of the Bankruptcy Code. A plan whereby EPEC
would become a wholly-owned subsidiary of Central and South West Corporation
("CSW") (the "EPEC Plan") would resolve certain issues to which APS could be
exposed by the bankruptcy, including potential claims by EPEC arising out of
APS' role as Palo Verde operating agent in connection with the 1989-90 Palo
Verde outages. In the disclosure statement relating to the EPEC Plan, EPEC
stated that these claims may be of "significant value." EPEC has granted APS a
release for these potential claims, but the release will become effective only
if, among other things, the EPEC Plan becomes effective.
In September 1994 EPEC received a letter from CSW stating that CSW believes
certain matters constitute a failure of certain closing conditions under the
merger agreement between the parties that would preclude the closing of the
merger unless the matters are timely resolved. EPEC subsequently advised CSW
that EPEC did not believe that a failure of any closing condition had occurred.
APS cannot predict when or if the EPEC Plan will become effective, or, if the
EPEC Plan does not become effective, whether EPEC would assert any claims
against APS arising out of the 1989-90 Palo Verde outages or the size of any
such claims. APS does not expect, however, that any such claims, if asserted,
would have a materially adverse impact on its operations or financial position.
8. APS has encountered axial tube cracking in the upper regions of the two steam
generators in Unit 2 and, to a lesser degree, in Unit 3. APS believes that this
form of tube degradation, the location of which is uncommon in the industry, is
due to the susceptibility of tube materials to a combination of deposits on the
tubes and the relatively high temperatures at which all three units are designed
to operate. APS has taken, and will continue to take, remedial actions that it
believes will retard further tube degradation to acceptable levels. These
actions have included chemically cleaning the Unit 2 and 3 steam generators, and
improving the water quality and reducing the operating temperature in all three
units.
All of the Palo Verde units are now operating at or near 100% capacity. In
March and October 1994 APS performed mid-cycle inspection outages at Unit 2. The
October outage revealed that the number of steam generator tubes with
indications of degradation was well within APS' projections. Unit 2 is
scheduled for a refueling and maintenance outage in early 1995. Palo Verde Unit
3 completed a refueling outage in June 1994 and is scheduled for a mid-cycle
inspection outage beginning in November 1994. Unit 1 is scheduled for a
refueling outage beginning in April 1995.
When tube cracks are detected during any outage, the affected tubes are
taken out of service by plugging. That has occurred in a number of tubes in all
three units, particularly in Unit 2, which is by far the most affected by
cracking and plugging. APS expects that the remedial actions referenced above
will slow the rate of plugging to an acceptable level. APS currently believes
that the Palo Verde steam generators are capable of operating for their designed
life of forty years, although, at some point in the future, long-term economic
considerations may make steam generator replacement a desirable option.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Three Months, Nine Months and Twelve Months ended
September 30, 1994 as Compared with Corresponding Periods Ended September 30,
1993.
The following discussion relates to Pinnacle West and its subsidiaries:
APS, SunCor and El Dorado.
LIQUIDITY AND CAPITAL RESOURCES
Pinnacle West
Pinnacle West's cash requirements and its ability to fund those
requirements are discussed under "Liquidity and Capital Resources" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Part II, Item 7 of the 1993 10-K and under "Business -- The
Company -- Capital Requirements" in Part I Item 1 of the 1993 10-K.
Pinnacle West continues to prepay its outstanding debt. Management expects
Pinnacle West to have sufficient cash flow available for mandatory and optional
debt repayments to allow parent company debt to be reduced from approximately
$539 million at the end of September, 1994 to approximately $430 million by
year-end 1994.
The Board declared a quarterly dividend of 22.5 cents per share of common
stock, payable on December 1, 1994 to shareholders of record on November 1,
1994, totalling approximately $19.7 million.
APS
For the nine months ended September 30, 1994, APS incurred approximately
$163 million in construction expenditures, accounting for approximately 60% of
the most recently estimated 1994 construction expenditures. APS has estimated
total construction expenditures for the years 1994, 1995, and 1996 to be
approximately $272 million, $298 million, and $257 million, respectively.
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 $587 million (of
which $518 million are optional), $106 million, and $4 million for the years
1994, 1995, and 1996, respectively. During the first nine months of 1994, APS
refunded approximately $562 million (96%) of the estimated 1994 total. This
amount includes the redemption, refunding, or repurchase of approximately $456
million of long-term debt and the redemption of approximately $104 million of
preferred stock, including premiums thereon. In October 1994 APS repurchased
approximately $5 million of its First Mortgage Bonds and incurred approximately
$11 million of long-term debt in connection with a tax-exempt financing. On
October 24, 1994, APS redeemed all $20 million of its outstanding $8.48
Cumulative Preferred Stock, Series S (the "Series S Stock"). Since December 31,
1993, APS has issued $100 million of its First Mortgage Bonds and incurred
approximately $412 million of long-term debt in connection with tax-exempt
financings.
Provisions in APS' mortgage bond indenture and articles of incorporation
require certain coverage ratios to be met before it can issue additional first
mortgage bonds or preferred stock. In addition, the mortgage bond indenture
limits the amount of additional bonds which may be issued to a percentage of net
property additions, to property previously pledged as security for certain bonds
that have been redeemed or retired and/or cash deposited with the mortgage bond
trustee. As of September 30, 1994, and adjusting for the (i) purchase of
approximately $5 million of First Mortgage Bonds, (ii) incurrence of
approximately $11 million of long-term debt in connection with a tax-exempt
financing, and (iii) redemption of $20 million of the Series S Stock, APS
estimates that the mortgage bond indenture and the articles of incorporation
would have allowed it to issue up to approximately $1.29 billion and $981
million of additional first mortgage bonds and preferred stock, respectively.
The ACC has authority over APS with respect to the issuance of long-term
debt and equity securities. Existing ACC orders allow APS 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 APS'
ability to meet its capital requirements.
RESULTS OF OPERATIONS
The following table shows the income and/or loss of Pinnacle West and its
subsidiaries for the three-month, nine-month, and twelve-month periods ended
September 30, 1994 and 1993:
<TABLE>
INCOME (LOSS)
(Unaudited)
(Dollars in Thousands)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
APS $ 110,359 $ 95,617 $ 200,196 $ 188,610 $ 231,132 $ 225,648
SunCor (693) (1,031) (129) (2,187) (1,932) (4,501)
El Dorado (3,300) (3,143) (4,183) (3,470) (4,617) (3,356)
Pinnacle West1 (12,375) (4,709) (31,572) (29,846) (43,400) (46,039)
--------- -------- --------- --------- --------- ---------
INCOME FROM OPERATIONS BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 93,991 86,734 164,312 153,107 181,183 171,752
INCOME FROM DISCONTINUED OPERATIONS
-- -- -- -- -- 6,000
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAX -- -- -- 19,252 -- 19,252
--------- -------- --------- --------- --------- ---------
NET INCOME $ 93,991 $ 86,734 $ 164,312 $ 172,359 $ 181,183 $ 197,004
========= ======== ========= ========= ========= =========
<FN>
<F1> Includes Pinnacle West's interest expense and operating expenses net of income tax benefits. Income tax
benefits are as follows (in thousands): $9,333 and $14,005 for the three months ended September 30, 1994
and 1993, respectively; $22,697 and $31,331 for the nine months ended September 30, 1994 and 1993,
respectively; and $31,844 and $41,910 for the twelve months ended September 30, 1994 and 1993,
respectively.
</FN>
</TABLE>
<PAGE>
APS
OPERATING RESULTS - THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1994 COMPARED TO
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1993
Earnings increased in the three-month period ended September 30, 1994
primarily due to increased operating revenues. Operating revenues were up
significantly due to higher sales resulting from warmer weather and continued
customer growth. Partially offsetting the increased operating revenues were the
absence of non-cash income related to the 1991 Settlement, which APS completed
recording in May 1994, and a retail rate reduction which became effective June
1, 1994 (see Note 5 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report). Although generation was up to meet the increased
sales, total fuel costs remained relatively flat between the two periods due
primarily to improved nuclear operations.
OPERATING RESULTS - NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1994 COMPARED TO
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1993
Earnings increased in the nine-month period ended September 30, 1994
primarily due to increased operating revenues and the reversal of certain
previously recorded depreciation related to Palo Verde (see Note 5 of Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this report).
Operating revenues were up significantly due to higher sales resulting from
warmer weather and continued customer growth. Partially offsetting the increased
operating revenues were increases in operations and maintenance expenses, lower
non-cash income related to the 1991 Rate Settlement, a retail rate reduction,
higher fuel costs, and lower interchange sales to other utilities. Operations
and maintenance expenses increased due primarily to employee severance costs
resulting from various APS cost-reduction efforts and higher power plant
maintenance costs. The increase in power plant maintenance costs was primarily
due to the timing of scheduled outages for certain fossil plants and certain
remedial actions at Palo Verde (see Note 8 of Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this report). Fuel costs were higher
due to replacement power related to reduced nuclear generation in the first half
of 1994 and to the increased generation needed to meet higher sales. These fuel
increases were partially offset by fewer interchange sales and improved nuclear
operations in the third quarter of 1994.
OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED SEPTEMBER 30, 1994 COMPARED TO
TWELVE-MONTH PERIOD ENDED SEPTEMBER 30, 1993
Earnings increased in the twelve-month period ended September 30, 1994
primarily due to increased operating revenues and the reversal of certain
previously recorded depreciation related to Palo Verde (see Note 5 of Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this report).
Operating revenues were up due to continued customer growth and warmer weather.
Partially offsetting the increased operating revenues were increased operations
and maintenance costs, lower non-cash income related to the 1991 Settlement,
higher fuel costs, lower interchange sales, and a retail rate reduction.
Operations and maintenance costs increased primarily due to higher power plant
maintenance costs and employee severance costs. The increase in power plant
maintenance costs was primarily due to the timing of scheduled outages for
certain fossil plants and certain remedial actions taken at Palo Verde (see Note
8 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of
this report). Fuel costs were higher due to replacement power related to reduced
nuclear generation plus the increased generation needed to meet higher sales.
These fuel increases were partially offset by fewer interchange sales and
improved nuclear operations in the third quarter of 1994. Lower interest costs
also contributed to the earnings increase.
Non-utility Operations
The parent company's interest expense decreased in both the nine-month and
twelve-month periods as a result of continuing debt prepayment. Interest in the
three-month period increased as a result of debt prepayment penalties.
SunCor's earnings in the three-month, nine-month and twelve-month periods
were positively impacted by increased land sales. Partially offsetting was
higher interest expense as a result of increased borrowings.
El Dorado's earnings decreased in the three-month, nine-month and
twelve-month periods due to lower earnings on venture capital investments and
increased loss reserves.
Other Income
Other income reflects accounting practices required for regulated public
utilities and represents a composite of cash and noncash items, including AFUDC.
Included in the nine months ended September 30, 1994 other income amounts are
$20.3 million of after-tax accretion income on Palo Verde Unit 3 and $5.6
million of after-tax income resulting from Palo Verde refund obligation
reversals recorded by APS in accordance with the 1991 Settlement. APS has now
recorded all of the Unit 3 accretion income and Palo Verde refund obligation
reversals related to the 1991 Settlement. See Note 3 of Notes to Consolidated
Financial Statements in Part II, Item 8 of the 1993 10-K. Also included in the
nine months ended September 30, 1994 other income amounts is a one-time
depreciation reversal related to Palo Verde in the amount of approximately $15.0
million after tax recorded by APS in accordance with the ACC Order (see Note 5
of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of
this report).
1994 Settlement Agreement
See Note 5 of Notes to Condensed Consolidated Financial Statements in Part
I, Item 1 of this report for a discussion of the ACC Order. Because of the
non-cash earnings (1) that APS expects to result from the accelerated
amortization of ITCs during the 1995-1999 period; and (2) that resulted from the
reversal of depreciation related to Palo Verde (associated with the 1991
Settlement), APS does not expect its earnings to be significantly affected by
the retail rate reduction resulting from the ACC Order.
PART II. OTHER INFORMATION
The following information relates primarily to Pinnacle West and its
principal subsidiary, APS.
ITEM 5. Other Information
Palo Verde Nuclear Generating Station
See Note 8 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for a discussion of issues relating to 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 APS' construction and financing programs.
Water Supply
As previously reported, in an action pending in Maricopa County Superior
Court relating to claims to water in the Lower Gila Watershed, issues important
to APS' claims were remanded to the trial court for further action and the trial
court certified its decision for interlocutory appeal to the Arizona Supreme
Court. See "Water Supply" in Part II, Item 5 of the June 10-Q. On September 28,
1994 the Arizona Supreme Court granted review of the July 30, 1994 trial court
decision.
Environmental Matters
As previously reported, on March 22, 1994 the EPA issued rules for
nitrogen oxide emissions limitations which will require APS to install
additional pollution control equipment at Four Corners. See "Environmental
Matters" in Part I, Item 1 of the 1993 10-K. APS has determined that it will
accelerate to 1997 compliance with these requirements. APS estimates that the
cost of such compliance will be approximately $20 million, most of which will be
incurred during 1995.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Company hereby incorporates the following Exhibits pursuant to
Exchange Act Rule 12b-32 and Regulation ss. 201.24 by reference to the filings
set forth below:
Exhibit No. Description
- - ------------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 30, 1994 and for the period ended
November 14, 1994, there were no Form 8-K Reports filed by the Company.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PINNACLE WEST CAPITAL CORPORATION
(Registrant)
By: /s/ Henry Sargent
--------------------------------
Henry Sargent
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Officer Duly Authorized to sign
this Report)
Dated: November 14, 1994
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