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 June 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
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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
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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 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 August 11, 1994 87,409,486
<PAGE>
Glossary
ACC - Arizona Corporation Commission
ACC Order - Final order of the ACC dated June 1, 1994 approving the 1994
Settlement Agreement
ACC Staff - Staff of the Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
APS - Arizona Public Service Company
cents/kWh - Cents per kilowatt-hour
Company - Pinnacle West Capital Corporation
El Dorado - El Dorado Investment Company
ITCs - Investment tax credits
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
1994 Settlement Agreement - Rate Settlement Agreement between APS and the
ACC Staff dated May 27, 1994
NRC - Nuclear Regulatory Commission
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
SFAS No. 106 - Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions"
SFAS No. 112 - Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment
Benefits"
SunCor - SunCor Development Company
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
June 30,
1994 1993
------------ ------------
Operating Revenues
Electric $ 417,588 $ 407,375
Real estate 15,436 6,277
------------ ------------
Total 433,024 413,652
------------ ------------
Fuel Expenses
Fuel for electric generation 60,090 55,029
Purchased power 16,304 16,577
------------ ------------
Total 76,394 71,606
------------ ------------
Operating Expenses
Utility operations and maintenance 108,444 94,191
Real estate operations 15,602 8,209
Depreciation and amortization 57,953 55,822
Taxes other than income taxes 57,302 54,669
------------ ------------
Total 239,301 212,891
------------ ------------
Operating Income 117,329 129,155
------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction 977 758
Palo Verde accretion income 13,616 18,469
Interest on long-term debt (57,202) (63,933)
Other interest (3,977) (4,055)
Allowance for borrowed funds used
during construction 1,350 1,080
Preferred stock dividend requirements of APS (6,972) (7,648)
Other-net 20,095 164
------------ ------------
Total (32,113) (55,165)
------------ ------------
Income From Continuing Operations
Before Income Taxes 85,216 73,990
Income Tax Expense 36,514 35,091
------------ ------------
Net Income $ 48,702 $ 38,899
============ ============
Average Common Shares Outstanding 87,418,627 87,193,004
Earnings Per Average Common Share Outstanding: $ 0.56 $ 0.45
============ ============
Dividends Declared Per Share $ 0.20 --
============ ============
See Notes to Consolidated Financial Statements
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Six Months Ended
June 30,
1994 1993
------------ ------------
Operating Revenues
Electric $ 782,764 $ 778,678
Real estate 24,860 10,076
------------ ------------
Total 807,624 788,754
------------ ------------
Fuel Expenses
Fuel for electric generation 118,058 110,037
Purchased power 26,367 27,073
------------ ------------
Total 144,425 137,110
------------ ------------
Operating Expenses
Utility operations and maintenance 206,065 185,302
Real estate operations 24,263 12,079
Depreciation and amortization 116,148 111,548
Taxes other than income taxes 110,924 106,225
------------ ------------
Total 457,400 415,154
------------ ------------
Operating Income 205,799 236,490
------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction 1,823 1,410
Palo Verde accretion income 33,596 36,459
Interest on long-term debt (113,566) (125,351)
Other interest (7,964) (7,943)
Allowance for borrowed funds used
during construction 2,517 1,966
Preferred stock dividend requirements of APS (14,482) (15,537)
Other-net 20,325 452
------------ ------------
Total (77,751) (108,544)
------------ ------------
Income From Continuing Operations
Before Income Taxes 128,048 127,946
Income Tax Expense 57,727 61,573
------------ ------------
Income From Continuing Operations 70,321 66,373
Cumulative Effect of Change in Accounting
for Income Taxes -- 19,252
------------ ------------
Net Income $ 70,321 $ 85,625
============ ============
Average Common Shares Outstanding 87,418,395 87,176,359
Earnings Per Average Common Share Outstanding:
Continuing Operations $ 0.80 $ 0.76
Accounting Change -- 0.22
------------ ------------
Total $ 0.80 $ 0.98
============ ============
Dividends Declared Per Share $ 0.40 --
============ ============
See Notes to Consolidated Financial Statements
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Twelve Months Ended
June 30,
1994 1993
------------ ------------
Operating Revenues
Electric $ 1,690,376 $ 1,694,398
Real estate 47,032 23,818
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Total 1,737,408 1,718,216
------------ ------------
Fuel Expenses
Fuel for electric generation 239,455 241,227
Purchased power 68,406 60,472
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Total 307,861 301,699
------------ ------------
Operating Expenses
Utility operations and maintenance 421,979 385,766
Real estate operations 50,404 30,518
Depreciation and amortization 228,158 222,272
Taxes other than income taxes 227,044 219,481
------------ ------------
Total 927,585 858,037
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Operating Income 501,962 558,480
------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction 2,739 2,961
Palo Verde accretion income 72,017 71,054
Interest on long-term debt (234,176) (253,926)
Other interest (16,526) (14,849)
Allowance for borrowed funds used
during construction 4,704 4,022
Preferred stock dividend requirements of APS (29,785) (31,572)
Other-net 17,591 (9,854)
------------ ------------
Total (183,436) (232,164)
------------ ------------
Income From Continuing Operations
Before Income Taxes 318,526 326,316
Income Tax Expense 144,600 155,992
------------ ------------
Income From Continuing Operations 173,926 170,324
Income From Discontinued Operations --
Net of Income Tax -- 6,000
Cumulative Effect of Change in Accounting
for Income Taxes -- 19,252
------------ ------------
Net Income $ 173,926 $ 195,576
============ ============
Average Common Shares Outstanding 87,361,921 87,116,077
Earnings Per Average Common Share Outstanding:
Continuing Operations $ 1.99 $ 1.96
Discontinued Operations -- 0.07
Accounting Change -- 0.22
------------ ------------
Total $ 1.99 $ 2.25
============ ============
Dividends Declared Per Share $ 0.60 --
============ ============
See Notes to Consolidated Financial Statements
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
(Thousands of Dollars)
June 30, December 31,
1994 1993
----------- -----------
Current Assets
Cash and cash equivalents $ 50,796 $ 52,127
Customer and other receivables--net 116,372 126,343
Accrued utility revenues 70,472 60,356
Material and supplies 95,031 96,174
Fossil fuel 24,577 34,220
Deferred income taxes 109,519 100,234
Other current assets 16,372 13,782
----------- -----------
Total current assets 483,139 483,236
----------- -----------
Investments and Other Assets
Real estate investments--net 398,127 402,873
Other assets 138,092 136,074
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Total investments and other assets 536,219 538,947
----------- -----------
Utility Plant
Electric plant in service, including
nuclear fuel 6,560,403 6,462,589
Construction work in progress 156,104 197,556
----------- -----------
Total utility plant 6,716,507 6,660,145
Less accumulated depreciation and
amortization 2,094,255 2,058,895
----------- -----------
Net utility plant 4,622,252 4,601,250
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Deferred Debits
Regulatory asset for income taxes 564,841 585,294
Palo Verde Unit 3 cost deferral 297,167 301,748
Palo Verde Unit 2 cost deferral 174,967 177,998
Other deferred debits 274,170 268,326
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Total deferred debits 1,311,145 1,333,366
----------- -----------
Total Assets $ 6,952,755 $ 6,956,799
=========== ===========
See Notes to Consolidated Financial Statements.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND EQUITY
(Thousands of Dollars)
June 30, December 31,
1994 1993
---------- ----------
Current Liabilities
Accounts payable $ 94,572 $ 97,489
Accrued taxes 99,043 96,303
Accrued interest 56,817 57,674
Short-term borrowings 119,500 148,000
Current maturities of long-term debt 71,252 78,841
Other current liabilities 62,853 60,845
---------- ----------
Total current liabilities 504,037 539,152
---------- ----------
Non-Current Liabilities
Long-term debt less current maturities 2,668,052 2,633,620
Other liabilities 8,003 8,246
---------- ----------
Total non-current liabilities 2,676,055 2,641,866
---------- ----------
Deferred Credits and Other
Deferred income taxes 1,311,170 1,278,673
Deferred investment tax credit 124,585 127,331
Unamortized gain - sale of utility plant 102,948 107,344
Other deferred credits 209,898 221,762
---------- ----------
Total deferred credits and other 1,748,601 1,735,110
---------- ----------
Commitments and Contingencies (Notes 6 and 7)
Minority Interests
Non-redeemable preferred stock of APS 193,561 193,561
---------- ----------
Redeemable preferred stock of APS 145,000 197,610
---------- ----------
Common Stock Equity
Common stock, no par value 1,643,430 1,642,783
Retained earnings 42,071 6,717
---------- ----------
Total common stock equity 1,685,501 1,649,500
---------- ----------
Total Liabilities and Equity $6,952,755 $6,956,799
========== ==========
See Notes to Consolidated Financial Statements.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(THOUSANDS OF DOLLARS)
Six Months Ended
June 30,
1994 1993
--------- ---------
Cash Flows From Operating Activities
Income from continuing operations before
cumulative effect of accounting change $ 70,321 $ 66,373
Items not requiring cash
Depreciation and amortization 129,799 131,150
Deferred income taxes--net 43,665 65,889
Provision for rate refund (9,308) (10,687)
Palo Verde accretion income (33,596) (36,459)
Other--net (2,255) (3,291)
Changes in current assets and liabilities
Accounts receivable--net 9,971 40,713
Accrued utility revenues (10,116) (11,505)
Materials, supplies and fossil fuel 10,786 5,102
Other current assets (2,590) (5,242)
Accounts payable 11,116 (23,574)
Accrued taxes 2,740 (10,148)
Accrued interest (857) 913
Other current liabilities 11,316 (8,058)
Additions to real estate (12,277) (11,009)
Sales of real estate 15,512 6,273
Other--net (20,786) 27,145
--------- ---------
Net Cash Flow Provided By Operating Activities 213,441 223,585
--------- ---------
Cash Flows From Investing Activities
Capital expenditures (121,691) (99,942)
Allowance for equity funds used
during construction 1,823 1,410
Other--net (1,699) (5,386)
--------- ---------
Net Cash Flow Used For Investing Activities (121,567) (103,918)
--------- ---------
Cash Flows From Financing Activities
Issuance of long-term debt 426,418 147,264
Short-term debt--net (28,500) (48,000)
Dividends paid on common stock (34,967) --
Repayment of long-term debt (404,193) (224,846)
Redemption of preferred stock (54,096) (28,040)
Other--net 2,133 2,421
--------- ---------
Net Cash Flow Used For Financing Activities (93,205) (151,201)
--------- ---------
Net Cash Flow (1,331) (31,534)
Cash and Cash Equivalents at Beginning of Period 52,127 87,926
--------- ---------
Cash and Cash Equivalents at End of Period $ 50,796 $ 56,392
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 113,924 $ 124,314
Income taxes $ 14,350 $ 17,724
See Notes to Consolidated Financial Statements.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The 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 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 June 30, 1994, the results of their operations for
the three months, six months and twelve months ended June 30, 1994 and 1993, and
their cash flows for the six months ended June 30, 1994 and 1993. It is
suggested that these consolidated financial statements and notes to 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 a Settlement
Agreement dated May 27, 1994 (the "1994 Settlement Agreement"), between APS and
ACC Staff. The 1994 Settlement Agreement replaces the agreement dated April 20,
1994. Pursuant to the terms of the 1994 Settlement Agreement, APS' annual retail
rates were reduced by approximately $38.3 million, or approximately 2.7%,
effective June 1, 1994. APS will also be allowed to recover through a surcharge
up to an additional $6 million for demand side management and renewable resource
programs, effective upon ACC approval of its application for such programs. The
reduction in retail rates offset by the demand side management surcharge would
result in a net rate reduction of approximately 2.2%. The ACC Order is final and
non-appealable. The following description of the ACC Order is a summary and is
qualified in its entirety by the ACC Order, incorporated herein by reference.
Future Retail Rate Changes
Neither APS nor the ACC Staff will file for a permanent change to APS'
general rates and charges prior to December 31, 1996 (the "Rate Moratorium
Period"), except (i) in the event of an emergency, such as APS' inability to
finance on reasonable terms, or material increases in APS' cost of service as a
result of federal, tribal, state or local laws, regulatory requirements or
orders; (ii) for changes relating to specific rate schedules or terms and
conditions of service that do not significantly affect the overall earnings of
APS; and (iii) in the case of certain individual large customers, the ACC Staff
will expeditiously review any APS tariff or contract filing for such customers
and recommend that such filings be decided promptly by the ACC.
If APS files its next general rate application before January 1, 1998,
the ACC will render its decision no later than twelve (12) months after the
filing, subject to certain exceptions.
If the next general rate proceeding results in no increase in
residential rates, the ACC will compare APS' costs of service during the test
period under review for fuel expense and operation and maintenance for all sales
(including sales for resale, but excluding interchange and non-traditional sales
for resale) to a target cost of service index of 3.63 cents/kWh. Forty-five
percent (45%) of any cost savings below the target cost of 3.63 cents/kWh would
be added to APS' otherwise appropriate revenue requirement in such rate
proceeding. APS' cost of service index for these items during 1993 was 3.71
cents/kWh.
All three Palo Verde units are, and in future rate cases will be,
included in APS' rate base as "used and useful," less the net prudence
disallowance required by the December 1991 rate case settlement (the "1991
Settlement"). As with any of APS' generating facilities, the ACC can re-examine
this position in future general rate cases in the event of significant changes
in the operating characteristics, reliability or efficiency of any or all of the
Palo Verde units, or if any unit is derated. In addition, the "in-lieu" refund
obligation resulting from the 1991 Settlement was deemed fully discharged as of
the date of the ACC Order. See Note 3 of Notes to Consolidated Financial
Statements in Part II, Item 8 of the 1993 10-K for additional information
regarding the 1991 Settlement.
Decommissioning Funding
The rates authorized by the ACC Order would include an annual
jurisdictional allowance for decommissioning funding for all three Palo Verde
units at the following levels: Unit 1 ($3.621 million); Unit 2 ($3.877 million);
and Unit 3 ($3.405 million). See Note 1.G of Notes to Consolidated Financial
Statements in Part II, Item 8 of the 1993 10-K for additional information
regarding APS' decommissioning obligations.
Renewable Resources/Demand Side Management
APS will spend specified annual amounts over an indefinite period on
renewable resources and demand side management projects and, on or before
December 31, 1994, will submit to the ACC Staff a three-year renewable resource
plan containing specified elements. See Paragraph K of the ACC Order,
incorporated herein by reference, for further details regarding renewable
resources and demand side management.
Investment Tax Credits; Depreciation Reversal
APS will, upon the receipt of a favorable ruling from the Internal
Revenue Service, amortize below the line approximately $137 million of its
jurisdictional unamortized investment tax credits ("ITCs") over a five year
period beginning with calendar year 1995 instead of the current remaining
amortization schedule of approximately twenty-five years. After this five year
period all such amortized ITCs will be treated as fully restored to APS' rate
base in any future ratemaking proceedings. The ACC Order also allowed APS to
reverse certain depreciation related to Palo Verde (associated with the 1991
Settlement), which resulted in approximately $15 million of after-tax income
during the three-month period ended June 30, 1994.
Pricing and Operating Procedures
The ACC Staff and APS will meet in a good faith attempt to develop new
pricing and operating procedures that are responsive to market conditions,
competitive pressures in the electric utility industry, and the ACC's
relationship to regulated utilities and their customers. The parties will submit
quarterly updates and a final report to the ACC within twelve months of the ACC
Order and seek prompt ACC approval of recommendations that will assist APS in
achieving its residential price stability goals and enhancing its
competitiveness related to non-residential customers.
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 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. This form of tube
degradation is uncommon in the industry and, in March 1993, led to a tube
rupture in Unit 2 resulting in the extension of a scheduled refueling outage
through September 1993. Although its analysis is not yet completed, APS believes
that the axial cracking in the Unit 2 and Unit 3 steam generator tubes 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 currently
designed to operate. APS also believes that it can retard further tube
degradation to acceptable levels by remedial actions, which include chemically
cleaning the generators and performing analyses and adjustments that will allow
the units to be operated at lower temperatures without appreciably reducing
their power output. Chemical cleaning has been completed in Units 2 and 3, and
APS expects to chemically clean the Unit 1 steam generators during its refueling
outage in 1995. APS began operating the units at approximately 86% capacity in
October 1993 to reduce the operating temperature, pending the completion of the
temperature analyses and appropriate modification of operating procedures. The
temperature analyses have been concluded for Units 1 and 3, and these units are
operating at or near 100% capacity. APS anticipates that Unit 2, which is
currently operating at 88% capacity, will be returned to full power by late
1994.
In March 1994, a mid-cycle inspection outage was completed at Unit 2 to
assess the status of the unit's steam generators' tubes and to continue
implementing a program of improvements. Unit 2 is scheduled for another
mid-cycle inspection outage beginning in September 1994 and a refueling and
maintenance outage in early 1995.
Palo Verde Unit 3 completed a refueling outage in June 1994 and, in
light of the axial cracking that APS has found to date, Unit 3 is scheduled for
a mid-cycle inspection outage beginning in November 1994. Palo Verde Unit 1 is
scheduled for a refueling outage beginning in April 1995. In late 1993 APS
concluded that Unit 1 could be safely operated until the 1995 outage and
submitted its supporting analysis to the NRC. However, the potential need for a
mid-cycle steam generator tube inspection outage in Unit 1 late in 1994 is
currently being evaluated.
During the six months ended June 30, 1994, APS incurred replacement
power costs totalling approximately $17 million (before income taxes) above
normal levels as a result of the Unit 2 mid-cycle outage and operating the units
at reduced power. Because a Unit 2 refueling and maintenance outage which was
scheduled to begin in late 1994 is now scheduled for 1995, APS does not expect
to incur any additional replacement power costs above normal levels during the
remainder of the year. In the event that a mid-cycle inspection outage is
necessary in late 1994 for Unit 1, and assuming that such an outage would last
about a month, the incremental replacement power costs and operation and
maintenance expenses related to the outage are estimated to be approximately $5
million before income taxes. In comparison, replacement power costs exceeded
normal levels in 1993 by approximately $15.5 million before income taxes due to
Palo Verde outages and reduced power operations.
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 because of its program to control the
tube degradation, the rate of plugging will slow to a manageable level.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Three Months, Six Months and Twelve Months Ended June 30,
1994 as Compared with Corresponding Periods Ended June 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.
The Board declared a quarterly dividend of 20 cents per share of common
stock, payable on September 1, 1994 to shareholders of record on August 1, 1994,
totalling approximately $17.5 million.
APS
For the six months ended June 30, 1994, APS incurred approximately $106
million in construction expenditures, accounting for approximately 39% 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
$582 million (of which $513 million are optional), $111 million and $4 million
for the years 1994, 1995 and 1996, respectively. During the first six months of
1994, APS refunded approximately $421 million (72%) of the estimated 1994 total.
This amount includes the redemption, refunding or repurchase of approximately
$367 million of long-term debt and the redemption of approximately $54 million
of preferred stock, including premiums thereon. During August 1994 APS purchased
on the open market approximately $24 million in aggregate principal amount of
its First Mortgage Bonds, 10-1/4% Series due 2000 (the "10-1/4% Bonds"). On
September 1, 1994 APS will redeem at maturity all outstanding shares of its
$8.50 Cumulative Preferred Stock, Series T ($100 Par Value) (the "Series T
Stock") in the amount of $50 million. Since December 31, 1993 APS has issued
$100 million of its First Mortgage Bonds and incurred approximately $303 million
of long-term debt consisting of borrowings from governmental authorities which
had funded that amount through the issuance of pollution control bonds.
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 June 30, 1994, and (i) adjusting for the
purchase of approximately $24 million of the 10-1/4% Bonds, and (ii) assuming
the redemption on September 1, 1994 of $50 million of the Series T Stock, APS
estimates that the mortgage bond indenture and the articles of incorporation
would have allowed it to issue up to approximately $1.26 billion and $1.04
billion 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
the APS' ability to meet its capital requirements.
Non-Utility Subsidiaries
On July 6, 1994 SunCor amended the Collateralized Mortgage Bond
Agreement to increase the principal amount from $25 million to $30 million.
RESULTS OF OPERATIONS
The following table shows the income and/or loss of Pinnacle West and
its subsidiaries for the three-month, six-month and twelve-month periods ended
June 30, 1994 and 1993:
<PAGE>
<TABLE>
INCOME (LOSS)
(Unaudited)
Dollars in Thousands)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
APS $ 58,879 $ 53,716 $ 89,837 $ 92,993 $ 216,390 $ 230,079
SunCor (400) (1,494) 564 (1,156) (2,270) (5,305)
El Dorado (457) (142) (883) (327) (4,459) (811)
Pinnacle West<F1> (9,320) (13,181) (19,197) (25,137) (35,735) (53,639)
-------- -------- -------- -------- --------- ---------
INCOME FROM OPERATIONS BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 48,702 38,899 70,321 66,373 173,926 170,324
INCOME FROM DISCONTINUED
OPERATIONS -- -- -- -- -- 6,000
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAX -- -- -- 19,252 -- 19,252
-------- -------- -------- -------- --------- ---------
NET INCOME $ 48,702 $ 38,899 $ 70,321 $ 85,625 $ 173,926 $ 195,576
======== ======== ======== ======== ========= =========
<FN>
<F1> Includes the parent company's interest expense and operating expenses net of income tax benefits.
Income tax benefits are as follows (in thousands): $6,638 and $9,569 for the three months ended June
30, 1994 and 1993, respectively; $13,364 and $17,326 for the six months ended June 30, 1994 and 1993,
respectively; and $36,516 and $37,331 for the twelve months ended June 30, 1994 and 1993, respectively.
</FN>
</TABLE>
<PAGE>
APS
OPERATING RESULTS - THREE-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED TO
THREE-MONTH PERIOD ENDED JUNE 30, 1993
APS' earnings increased in the three-month period ended June 30, 1994
primarily due to the reversal of certain previously recorded depreciation
related to Palo Verde and increased revenues. Pursuant to the ACC Order, APS
reversed accumulated depreciation related to the portion of Palo Verde written
off as a result of the 1991 Settlement. See Note 5 of Notes to Consolidated
Financial Statements in Part I, Item 1 of this report for a detailed discussion
of the ACC Order. Operating revenues increased primarily due to customer growth.
These positive factors were partially offset by increases in both operation and
maintenance expenses and fuel costs. Operation and maintenance expenses were
higher primarily due to employee severance costs resulting from various APS cost
reduction efforts and fossil plant maintenance costs. Fuel costs were higher
primarily due to replacement power related to reduced nuclear generation.
OPERATING RESULTS - SIX-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED TO SIX-MONTH
PERIOD ENDED JUNE 30, 1993
APS' earnings decreased in the six-month period ended June 30, 1994
primarily due to increases in operation and maintenance expenses and fuel costs.
Operation and maintenance expenses increased due to higher power plant
maintenance costs and employee severance costs. Fuel costs were higher primarily
due to replacement power related to reduced nuclear generation, offset partially
by the effect of lower interchange sales. These negative factors were partially
offset by the depreciation reversal related to Palo Verde and increased
revenues. Revenues increased due to retail customer growth and higher usage per
customer, partially offset by lower interchange sales due to reduced nuclear
generation.
OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED TO
TWELVE-MONTH PERIOD ENDED JUNE 30, 1993
APS' earnings decreased in the twelve-month period ended June 30, 1994
primarily due to increased operation and maintenance expenses, higher fuel costs
and lower operating revenues. Operation and maintenance expenses increased due
to higher power plant maintenance costs, the implementation of SFAS No. 106 and
SFAS No. 112 in 1993 (see Note 9 of Notes to Consolidated Financial Statements
in Part II, Item 8 of the 1993 10-K), and employee severance costs. Fuel costs
were higher primarily because of replacement power costs due to reduced nuclear
generation, partially offset by the effect of lower interchange sales. Operating
revenues were down due to lower interchange sales and milder weather partially
offset by customer growth. These negative factors were partially offset by the
depreciation reversal related to Palo Verde and lower interest costs.
Non-utility Operations
The parent company's interest expense decreased in the three-month,
six-month and twelve-month periods as a result of continuing debt prepayment.
SunCor's earnings in the three-month, six-month and twelve-month
periods were positively impacted by increased land sales.
El Dorado's earnings decreased in the three-month, six-month and
twelve-month periods due to lower earnings on venture capital investments.
Other Income
Net income reflects accounting practices required for regulated public
utilities and represents a composite of cash and noncash items, including AFUDC.
In accordance with the 1991 Settlement, during the six months ended June 30,
1994, APS recorded $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. 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. In accordance with the ACC Order, during the three months ended June
30, 1994, APS also recorded a one-time depreciation reversal related to Palo
Verde in the amount of approximately $15.0 million after tax. See Note 5 of
Notes to Consolidated Financial Statements in Part I, Item 1 of this report.
Tax Legislation
On April 4, 1994, a comprehensive tax package was signed into Arizona
law that, among other things, reduces the assessment ratio for utility property
from the current assessment ratio of 30% to 25%. This reduction will be phased
in over a five-year period at one percent per year beginning in 1995. This
legislation is expected to reduce or offset the historical rate of growth of
property tax expense.
1994 Settlement Agreement
See Note 5 of Notes to 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 (subject to Internal Revenue Service approval);
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 as a result of the ACC Order.
PART II. OTHER INFORMATION
The following information relates primarily to Pinnacle West and its
principal subsidiary, APS.
ITEM 4. Submission of Matters to a Vote of Security-Holders
At the Company's Annual Meeting of Shareholders held on May 19, 1994
shareholder proposals were submitted as to the following matters:
Abstentions
Votes Votes and Broker
For Against Non Votes
----- ------- -----------
Proposal to approve the Company's 60,634,762 17,501,461 1,128,747
1994 Long-Term Incentive Plan 77% 22% 1%
Proposal to approve the Company's 62,001,609 16,054,155 1,209,206
Director Equity Participation Plan 78% 21% 1%
In addition, at the same annual meeting the following persons were
elected Class III Directors with a term to expire at the 1997 annual meeting of
shareholders:
Votes Abstentions
Votes Against or and Broker
For Withheld Non Votes
----- ---------- -----------
Pamela Grant 77,544,042 1,680,147 N/A
Martha O. Hesse 77,684,986 1,592,549 N/A
William S. Jamieson, Jr. 77,625,646 1,639,062 N/A
Richard Snell 77,656,379 1,637,069 N/A
ITEM 5. Other Information
Palo Verde Nuclear Generating Station
See Note 7 of Notes to Consolidated Financial Statements in Part I,
Item 1 of this report for a discussion of the tube cracking in 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.
See "Business of Arizona Public Service Company -- Water Supply" in Part I, Item
1 of the 1993 10-K. On June 30, 1994 the trial court rendered its decision with
respect to these issues. The trial court has certified its decision for
interlocutory appeal to the Arizona Supreme Court, and the Supreme Court has not
yet rendered its decision.
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:
Originally Filed Date
Exhibit No. Description as Exhibit File No. Effective
- ----------- ----------- ---------------- -------- ---------
10.1 ACC Order dated 10.1 to APS' 1-4473 8/15/94
June 1, 1994 June 1994
Form 10-Q Report
(b) Reports on Form 8-K
During the quarter ended June 30, 1994 and for the period ended August
12, 1994, the Company filed the following Reports on Form 8-K:
Report filed May 10, 1994 regarding the inspection of the Palo Verde
Unit 3 steam generators and related issues.
Report filed May 26, 1994 regarding the rescission by the Secretary of
Labor of a final order approving a settlement agreement between APS and a
former contract employee.
SIGNATURE
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: August 15, 1994
