FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8962
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PINNACLE WEST CAPITAL CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0512431
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 E. Van Buren St., P.O. Box 52132, Phoenix, Arizona 85072-2132
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(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 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, no par value,
outstanding as of August 7, 1995: 87,414,449
<PAGE>
Glossary
--------
ACC - Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
APS - Arizona Public Service Company
Company - Pinnacle West Capital Corporation
El Dorado - El Dorado Investment Company
EPEC - El Paso Electric Company
Four Corners - Four Corners Power Plant
ITCs - Investment tax credits
NNEPA - Navajo Nation Environmental Protection Agency
1935 Act - Public Utility Holding Company Act of 1935
1994 10-K - Pinnacle West Capital Corporation Annual Report on Form 10-K for the
fiscal year ended December 31, 1994
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
SEC - Securities and Exchange Commission
SFAS No. 71 - Statement of Financial Accounting Standards No. 71,"Accounting for
the Effects of Certain Types of Regulation"
SFAS No. 121 - Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of"
SunCor - SunCor Development Company
<PAGE>
PART I. 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
June 30,
1995 1994
------------ -----------
Operating Revenues
Electric $ 380,178 $ 397,156
Real estate 13,018 15,436
----------- -----------
Total 393,196 412,592
----------- -----------
Fuel Expenses
Fuel for electric generation 44,823 60,090
Purchased power 17,814 16,304
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Total 62,637 76,394
----------- -----------
Operating Expenses
Utility operations and maintenance 94,251 108,444
Real estate operations 12,856 15,602
Depreciation and amortization 60,843 57,953
Taxes other than income taxes 35,435 36,870
----------- -----------
Total 203,385 218,869
----------- -----------
Operating Income 127,174 117,329
----------- -----------
Other Income (Deductions)
Allowance for equity funds used
during construction 1,348 977
Palo Verde accretion income - 13,616
Interest on long-term debt (52,677) (57,202)
Other interest (4,517) (3,977)
Allowance for borrowed funds used
during construction 2,355 1,350
Preferred stock dividend requirements of APS (4,776) (6,972)
Other-net 1,321 20,095
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Total (56,946) (32,113)
----------- -----------
Income Before Income Taxes 70,228 85,216
Income Tax Expense 27,979 36,514
----------- -----------
Net Income $ 42,249 $ 48,702
=========== ===========
Average Common Shares Outstanding 87,403,426 87,418,627
Earnings Per Average Common Share Outstanding $ 0.48 $ 0.56
=========== ===========
Dividends Declared Per Share $ 0.225 $ 0.200
=========== ===========
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)
Six Months Ended
June 30,
1995 1994
----------- -----------
Operating Revenues
Electric $ 717,146 $ 743,205
Real estate 22,164 24,860
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Total 739,310 768,065
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Fuel Expenses
Fuel for electric generation 91,533 118,058
Purchased power 26,024 26,367
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Total 117,557 144,425
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Operating Expenses
Utility operations and maintenance 185,683 206,065
Real estate operations 20,351 24,263
Depreciation and amortization 121,690 116,148
Taxes other than income taxes 71,156 71,365
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Total 398,880 417,841
----------- -----------
Operating Income 222,873 205,799
----------- -----------
Other Income (Deductions)
Allowance for equity funds used
during construction 2,534 1,823
Palo Verde accretion income - 33,596
Interest on long-term debt (107,597) (113,566)
Other interest (7,753) (7,964)
Allowance for borrowed funds used
during construction 4,351 2,517
Preferred stock dividend requirements of APS (9,583) (14,482)
Other-net 5,913 20,325
----------- -----------
Total (112,135) (77,751)
----------- -----------
Income Before Income Taxes 110,738 128,048
Income Tax Expense 43,866 57,727
----------- -----------
Net Income $ 66,872 $ 70,321
=========== ===========
Average Common Shares Outstanding 87,398,822 87,418,395
Earnings Per Average Common Share Outstanding $ 0.77 $ 0.80
=========== ============
Dividends Declared Per Share $ 0.450 $ 0.400
=========== ============
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
June 30,
1995 1994
----------- -----------
Operating Revenues
Electric $ 1,600,109 $ 1,603,857
Real estate 56,557 47,032
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Total 1,656,666 1,650,889
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Fuel Expenses
Fuel for electric generation 210,578 239,455
Purchased power 63,243 68,406
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Total 273,821 307,861
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Operating Expenses
Utility operations and maintenance 391,539 421,979
Real estate operations 55,877 50,404
Depreciation and amortization 242,868 228,158
Taxes other than income taxes 141,717 140,525
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Total 832,001 841,066
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Operating Income 550,844 501,962
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Other Income (Deductions)
Allowance for equity funds used
during construction 4,652 2,739
Palo Verde accretion income - 72,017
Interest on long-term debt (223,841) (234,176)
Other interest (14,974) (16,526)
Allowance for borrowed funds used
during construction 7,276 4,704
Preferred stock dividend requirements of APS (20,375) (29,785)
Other-net 2,697 17,591
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Total (244,565) (183,436)
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Income Before Income Tax 306,279 318,526
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Income Tax Expense (Benefit)
Income tax expense 135,879 144,600
Non-recurring income tax benefit (26,770) -
----------- -----------
Total 109,109 144,600
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Net Income $ 197,170 $ 173,926
=========== ===========
Average Common Shares Outstanding 87,401,261 87,361,921
Earnings Per Average Common Share Outstanding $ 2.26 $ 1.99
=========== ===========
Dividends Declared Per Share $ 0.875 $ 0.600
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
ASSETS
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(Thousands of Dollars)
June 30, December 31,
1995 1994
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Current Assets
Cash and cash equivalents $ 31,034 $ 34,719
Customer and other receivables--net 111,770 136,143
Accrued utility revenues 65,334 55,432
Material and supplies 88,763 89,864
Fossil fuel 29,464 35,735
Deferred income taxes 62,861 68,263
Other current assets 20,655 15,422
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Total current assets 409,881 435,578
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Investments and Other Assets
Real estate investments--net 417,665 408,505
Other assets 162,309 153,384
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Total investments and other assets 579,974 561,889
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Utility Plant
Electric plant in service, including
nuclear fuel 6,662,911 6,602,799
Construction work in progress 243,479 224,312
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Total utility plant 6,906,390 6,827,111
Less accumulated depreciation and
amortization 2,281,932 2,203,038
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Net utility plant 4,624,458 4,624,073
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Deferred Debits
Regulatory asset for income taxes 551,630 557,049
Palo Verde Unit 3 cost deferral 288,006 292,586
Palo Verde Unit 2 cost deferral 168,905 171,936
Other deferred debits 282,592 266,641
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Total deferred debits 1,291,133 1,288,212
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Total Assets $6,905,446 $6,909,752
========== ==========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
LIABILITIES AND EQUITY
----------------------
(Thousands of Dollars)
June 30, December 31,
1995 1994
----------- -----------
Current Liabilities
Accounts payable $ 80,184 $ 126,842
Accrued taxes 110,740 89,144
Accrued interest 52,166 56,058
Short-term borrowings 179,255 131,500
Current maturities of long-term debt 78,927 78,512
Other current liabilities 61,435 50,060
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Total current liabilities 562,707 532,116
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Non-Current Liabilities
Long-term debt less current maturities 2,541,422 2,588,525
Other liabilities 11,175 8,679
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Total non-current liabilities 2,552,597 2,597,204
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Deferred Credits and Other
Deferred income taxes 1,299,297 1,297,298
Deferred investment tax credit 113,259 121,426
Unamortized gain - sale of utility plant 94,154 98,551
Other deferred credits 211,045 218,179
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Total deferred credits and other 1,717,755 1,735,454
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Commitments and Contingencies (Notes 6, 7 and 8)
Minority Interests
Non-redeemable preferred stock of APS 193,561 193,561
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Redeemable preferred stock of APS 75,000 75,000
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Common Stock Equity
Common stock, no par value 1,641,062 1,641,196
Retained earnings 162,764 135,221
----------- ----------
Total common stock equity 1,803,826 1,776,417
----------- ----------
Total Liabilities and Equity $6,905,446 $6,909,752
=========== ==========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(THOUSANDS OF DOLLARS)
Six Months Ended
June 30,
1995 1994
----------- -----------
Cash Flows From Operating Activities
Net income $ 66,872 $ 70,321
Items not requiring cash
Depreciation and amortization 137,165 129,799
Deferred income taxes--net 12,820 43,665
Revenue refund reversal - (9,308)
Palo Verde accretion income - (33,596)
Other--net (6,632) (2,255)
Changes in current assets and liabilities
Accounts receivable--net 24,284 9,971
Accrued utility revenues (9,902) (10,116)
Materials, supplies and fossil fuel 7,372 10,786
Other current assets (5,233) (2,590)
Accounts payable (30,668) 11,116
Accrued taxes 21,596 2,740
Accrued interest (3,892) (857)
Other current liabilities 11,391 11,316
Decrease (increase) in land held (10,592) 3,235
Other--net (23,390) (20,786)
--------- ----------
Net Cash Flow Provided By Operating Activities 191,191 213,441
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Cash Flows From Investing Activities
Capital expenditures (151,112) (121,691)
Allowance for equity funds used during
construction 2,534 1,823
Other--net (1,259) (1,699)
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Net Cash Flow Used For Investing Activities (149,837) (121,567)
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Cash Flows From Financing Activities
Issuance of long-term debt 96,673 426,418
Short-term borrowings--net 47,755 (28,500)
Dividends paid on common stock (39,330) (34,967)
Repayment of long-term debt (150,003) (404,193)
Redemption of preferred stock (4) (54,096)
Other--net (130) 2,133
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Net Cash Flow Used For Financing Activities (45,039) (93,205)
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Net Cash Flow (3,685) (1,331)
Cash and Cash Equivalents at Beginning of Period 34,719 52,127
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Cash and Cash Equivalents at End of Period $ 31,034 $ 50,796
========= ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 111,620 $ 113,924
Income taxes $ 21,317 $ 14,350
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. Consistent with the 1995
presentation, prior years' electric operating revenues and other taxes have been
restated to exclude sales tax on electric revenues.
2. In the opinion of the Company, 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 June 30, 1995, the results of
operations for the three months, six months and twelve months ended June 30,
1995 and 1994, and the cash flows for the six months ended June 30, 1995 and
1994. It is suggested that these condensed 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 1994 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 for other reasons, the 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, 1994.
5. In May 1994 the ACC approved a retail rate settlement agreement between APS
and the ACC staff which provided for a net annual retail rate reduction of
approximately $32.3 million ($19 million after tax), or 2.2% on average,
effective June 1, 1994. As part of the settlement, APS reversed approximately
$20 million of depreciation ($15 million after tax) related to a 1991 Palo Verde
write-off. The 1994 rate settlement also provided for the accelerated
amortization of substantially all deferred ITCs over a five-year period
beginning in 1995. In addition, the 1994 rate settlement included a moratorium
on filing for permanent rate changes, except under certain circumstances, prior
to the end of 1996 for both APS and the ACC staff, and an incentive rewarding
reduction in fuel and operating and maintenance cost per kilowatt-hour below
established targets.
6. The Palo Verde participants have insurance for public liability payments
resulting from nuclear energy hazards to the full limit of liability under
federal law. This potential liability is covered by primary liability insurance
provided by commercial insurance carriers in the amount of $200 million and the
balance by an industry-wide retrospective assessment program. The maximum
assessment per reactor under the retrospective rating program for each nuclear
incident is approximately $79 million, subject to an annual limit of $10 million
per incident. Based upon 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 approximately $9 million.
The Palo Verde participants maintain "all risk" (including nuclear
hazards) insurance for property damage to, and decontamination of, property at
Palo Verde in the aggregate amount of $2.78 billion, a substantial portion of
which must first be applied to stabilization and decontamination. 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 tube cracking in the Palo Verde steam generators and has
taken, and will continue to take, remedial actions that it believes have slowed
the rate of tube degradation. The projected service life of the steam generators
is reassessed periodically in conjunction with inspections made during scheduled
outages of the Palo Verde units. APS' ongoing analyses indicate that it will be
economically desirable for APS to replace the Unit 2 steam generators, which
have been most affected by tube cracking, in five to ten years. APS expects that
the steam generator replacement can be accomplished within financial parameters
established before replacement was a consideration, and APS estimates that its
share of the replacement costs (in 1995 dollars and including installation and
replacement power costs) will be between $30 million and $50 million, most of
which will be incurred after the year 2000. APS expects that the replacement
would be performed in conjunction with a normal refueling outage in order to
limit incremental outage time to approximately 50 days. Based on the latest
available data, APS estimates that the Unit 1 and Unit 3 steam generators should
operate for their designed life of 40 years (until 2025 and 2027, respectively),
although APS will continue its periodic assessment of these steam generators.
8. El Paso Electric Company, one of the joint owners of Palo Verde and Four
Corners, has been operating under Chapter 11 of the Bankruptcy Code since 1992.
On June 9, 1995, Central and South West Corporation filed with the bankruptcy
court a revocation of the previously confirmed plan whereby, among other things,
certain issues, including EPEC allegations against APS regarding the 1989-90
Palo Verde outages, would have been resolved, and EPEC would have assumed the
joint facilities operating agreements. APS does not expect that the revocation
of the plan will have a material adverse effect on its operations or financial
position.
PINNACLE WEST CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
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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 "Capital Needs and Resources" in Management's
Discussion and Analysis of Financial Condition and Results of Operations in Part
II, Item 7 of the 1994 10-K.
During June 1995 Pinnacle West prepaid $16.5 million of its debt,
reducing the aggregate principal amount to approximately $398 million.
The Board declared a quarterly dividend of 22.5 cents per share of
common stock, payable June 1, 1995 to shareholders of record on May 1, 1995,
totaling approximately $19.7 million.
APS
---
For the six months ended June 30, 1995 APS incurred approximately $129
million in construction expenditures, accounting for approximately 45% of the
most recently estimated 1995 construction expenditures. APS has estimated total
construction expenditures for the years 1995, 1996 and 1997 to be approximately
$288 million, $257 million and $236 million, respectively. These amounts include
about $27 million each year for nuclear fuel expenditures.
Since December 31, 1994 APS has (i) issued $75 million of its Junior
Subordinated Deferrable Interest Debentures ("MIDS"), (ii) incurred
approximately $10 million of long-term debt in connection with a tax-exempt
financing, (iii) redeemed on March 2, 1995, $49.15 million of its First Mortgage
Bonds, 10.25% Series due 2000, (iv) repurchased approximately $9 million of its
First Mortgage Bonds, 9 1/2% Series due 2021 (the "9 1/2% Bonds") and (v)
redeemed on May 1, 1995, $50 million of its First Mortgage Bonds, 13 1/4% Series
due 2007.
Refunding obligations for preferred stock and long-term debt, a
capitalized lease obligation and certain actual and anticipated early
redemptions, including premiums thereon, are expected to total approximately
$116 million, $4 million and $164 million for the years 1995, 1996 and 1997,
respectively. During the first six months of 1995 APS refunded approximately
$108 million (93%) of the estimated 1995 total.
Provisions in APS' mortgage bond indenture and articles of
incorporation require certain coverage ratios to be met before APS can issue
additional first mortgage bonds or preferred stock. In addition, the bond
indenture limits the amount of additional first mortgage bonds which may be
issued to a percentage of net property additions, to the amount of certain first
mortgage bonds that have been redeemed or retired, and/or to cash deposited with
the mortgage bond trustee. As of June 30, 1995 and adjusting for the (i)
incurrence of approximately $3.5 million of long-term debt in connection with a
tax-exempt financing and (ii) repurchase of approximately $5.5 million of the 9
1/2% Bonds, APS estimates that the mortgage bond indenture and the articles of
incorporation would have allowed APS to issue up to approximately $1.454 billion
and $862 million of additional first mortgage bonds and preferred stock,
respectively.
The ACC has authority over 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.
OPERATING RESULTS
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, 1995 and 1994:
<TABLE>
Income (Loss)
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1995 1994 1995 1994 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
APS $ 48,676 $ 58,879 $ 81,701 $ 89,837 $ 210,076 $ 216,390
SunCor 187 (400) 1,354 564 1,329 (2,270)
El Dorado 1,260 (457) 403 (883) (2,721) (4,459)
Pinnacle West (1) (7,874) (9,320) (16,586) (19,197) (11,514) (35,735)
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME $ 42,249 $ 48,702 $ 66,872 $ 70,321 $ 197,170 $ 173,926
========== ========== ========== ========== ========== ==========
(1) Includes Pinnacle West's interest expense and operating expenses net of
income tax benefits. Income tax benefits are as follows (in thousands):
$4,134 and $6,638 for the three months ended June 30, 1995 and 1994,
respectively; $8,128 and $13,364 for the six months ended June 30, 1995 and
1994, respectively; and $49,061 and $36,516 for the twelve months ended June
30, 1995 and 1994, respectively.
</TABLE>
APS
---
Operating Results - Three-month period ended June 30, 1995 compared to
three-month period ended June 30, 1994
Earnings decreased in the three-month period ended June 30, 1995
primarily due to the reversal in 1994 of certain previously-recorded
depreciation related to Palo Verde (see Note 5 of Notes to Condensed
Consolidated Financial Statements in Part I, Item 1 of this report), lower
revenues and the absence of non-cash accretion income and revenue refund
reversals related to a 1991 rate settlement (see Notes 1J and 1C of Notes to
Consolidated Financial Statements in Part II, Item 8 of the 1994 10-K).
Operating revenues were lower primarily due to milder weather and a retail rate
reduction which became effective June 1, 1994. Partially offsetting these
negative factors were lower operations and maintenance expenses, lower fuel
costs, customer growth, accelerated investment tax credit amortization and lower
preferred stock dividends. Operations and maintenance expenses decreased due to
severance costs incurred in 1994, lower fossil plant overhaul costs and improved
nuclear operations. Fuel expense was down due largely to lower fuel prices and
lower average fuel costs resulting from increased nuclear generation. The
accelerated investment tax credit amortization was a result of the 1994 rate
settlement and is reflected as a decrease to income tax expense. Preferred stock
dividends decreased due to less preferred stock outstanding.
Operating Results - Six-month period ended June 30, 1995 compared to six-month
period ended June 30, 1994
Earnings decreased in the six-month period ended June 30, 1995
primarily due to the absence of non-cash accretion income and revenue refund
reversals related to a 1991 rate settlement (see Notes 1J and 1C of Notes to
Consolidated Financial Statements in Part II, Item 8 of the 1994 10-K), lower
revenues and the reversal in 1994 of certain previously-recorded depreciation
related to Palo Verde (see Note 5 of Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this report). Revenues were lower primarily due
to milder weather and a retail rate reduction which became effective June 1,
1994. Partially offsetting these negative factors were customer growth, lower
fuel costs, lower operations and maintenance expenses, accelerated investment
tax credit amortization, a gain recognized on the sale of a small subsidiary and
lower preferred stock dividends. Fuel expense was down due largely to lower fuel
prices and lower average fuel costs resulting from increased nuclear generation.
Operations and maintenance expenses decreased due to improved nuclear
operations, severance costs incurred in 1994 and lower fossil plant overhaul
costs. The accelerated investment tax credit amortization was a result of the
1994 rate settlement and is reflected as a decrease to income tax expense.
Preferred stock dividends decreased due to less preferred stock outstanding.
Operating Results - Twelve-month period ended June 30, 1995 compared to
twelve-month period ended June 30, 1994
Earnings decreased in the twelve-month period ended June 30, 1995
primarily due to the absence of non-cash accretion income and revenue refund
reversals related to a 1991 rate settlement (see Notes 1J and 1C of Notes to
Consolidated Financial Statements in Part II, Item 8 of the 1994 10-K), the
effects on revenue of a retail rate reduction which became effective June 1,
1994 (see Note 5 of Notes to Condensed Consolidated Financial Statements in Part
I, Item 1 of this report), the reversal in 1994 of certain previously-recorded
depreciation related to Palo Verde and increased depreciation expense.
Depreciation expense was up primarily due to higher plant balances and higher
depreciation rates. Partially offsetting these negative factors were customer
growth, lower fuel costs, lower operations and maintenance expenses, warmer
weather in the second half of 1994, lower preferred stock dividends and
accelerated investment tax credit amortization. Fuel expense was down due
largely to lower average fuel costs resulting from increased nuclear generation
and lower fuel prices. Operations and maintenance expenses decreased due to
improved nuclear operations and lower fossil plant overhaul costs. Preferred
stock dividends decreased due to less preferred stock outstanding. The
accelerated investment tax credit amortization was a result of the 1994 rate
settlement and is reflected as a decrease to income tax expense.
Non-utility Operations
----------------------
Pinnacle West interest expense decreased in the three-month, six-month and
twelve-month periods as the Company continued to repay its outstanding debt.
Earnings increased in the twelve-month period due to a non-recurring income tax
benefit of approximately $26.8 million related to a change in tax law.
SunCor earnings increased in the three-month and six-month periods due to
increased earnings in joint ventures. The twelve-month period earnings increased
as a result of increased land sales.
El Dorado earnings increased in the three-month, six-month and twelve-month
periods due to the sale of stock of a venture capital investment.
Other Income
------------
Other income reflects accounting practices required for regulated
public utilities and represents a composite of cash and non-cash items,
including AFUDC and accretion income on Palo Verde Unit 3, which APS completed
recording in May 1994. See Note 1J of Notes to Consolidated Financial Statements
in Part II, Item 8 of the 1994 10-K. For the six months ended June 30, 1995,
other income included a gain of about $5 million on the sale of a small APS
subsidiary. Included in other income for the three months ended June 30, 1994,
was a one-time depreciation reversal related to Palo Verde of approximately
$15.0 million, after tax. See Note 5 of Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this report.
ACCOUNTING ISSUE
In March 1995 the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which is effective in 1996. This statement requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss would be recognized if the sum of the estimated future
undiscounted cash flows to be generated by an asset is less than its carrying
value. The amount of the loss would be based on a comparison of book value to
fair value. The standard also amends SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," to require write-off of a regulatory asset if it
is no longer probable that future revenues will recover the cost of the asset.
This new standard does not impact the Company at this time; however, it will be
reviewed on an ongoing basis.
COMPETITION
A significant challenge for APS will be how well it is able to respond
to increasingly competitive conditions in the electric utility industry, while
continuing to earn an acceptable return for its shareholders. Strategies
emphasize managing costs, stabilizing electric rates, negotiating long-term
contracts with large customers and capitalizing on the growth characteristics of
its service territory.
One of the issues that must be addressed responsibly is the recovery in
a more competitive environment of the carrying value of assets acquired or
recorded under the existing regulatory environment.
The 1994 rate settlement provided for a study by APS and the ACC staff
to develop new procedures to address market conditions and increasing
competition in the electric utility industry. APS presently anticipates making
its recommendations in late 1995. A separate ACC proceeding on competition was
opened by the ACC in mid-1994 and is ongoing.
As the forces of competition continue to impact the industry, it will
become clearer as to what customer sectors and what regions will be most
affected and what strategies are best to deal with those forces.
PART II. OTHER INFORMATION
--------------------------
The following information relates primarily to Pinnacle West (the
"Company") and its principal subsidiary, Arizona Public Service Company ("APS").
Item 4. Submission of Matters to a Vote of Security-Holders
--------------------------------------------------------------
At the Company's Annual Meeting of Shareholders held on May 17, 1995
the following shareholder proposal was submitted to shareholders:
Abstentions
Votes Votes and Broker
For Against Non Votes
----- ------- -----------
Proposal that Board members' 7,894,342 60,077,313 10,375,925
total compensation consist of
Company common stock
In addition, at the same annual meeting, the following persons were elected
Class III Directors with a term to expire at the 1998 annual meeting of
shareholders:
Abstentions
Votes Votes and Broker
For Against Non Votes
----- ------- -----------
Roy A. Herberger, Jr. 77,364,810 1,104,951 N/A
Henry B. Sargent 77,703,032 1,376,834 N/A
Humberto S. Lopez 76,307,324 2,258,500 N/A
Item 5. Other Information
--------------------------
Palo Verde Nuclear Generating Station
-------------------------------------
See Note 7 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for a discussion of issues regarding the Palo
Verde steam generators.
As previously reported, in August and September 1994, Administrative Law
Judges recommended to the Secretary of Labor that the settlement agreement
between APS and a former contract employee be approved. See "Business of
Arizona Public Service Company -- Palo Verde Nuclear Generating
Station-Department of Labor Matter" in Part I, Item 1 of the 1994 10-K. The
settlement agreement was approved by the Secretary of Labor in June 1995.
Arizona Corporation Commission Petition
---------------------------------------
As previously reported, in May 1990 the ACC filed a petition with the
SEC requesting the SEC to revoke or modify Pinnacle West's exemption under the
1935 Act. See "Regulation - Public Utility Holding Company" in Part I, Item 1
of the 1994 10-K. On June 20, 1995, the SEC issued a Report on the Regulation
of Public Utility Holding Companies in which, as its preferred option, the SEC
recommended to the Congress conditional repeal of the 1935 Act, with an
adequate transition period. The SEC further recommended that legislation
repealing the 1935 Act should include provision for state access to books and
records of all companies in the holding company system, and for federal audit
authority and oversight of affiliate transactions. The Company cannot predict
what action, if any, the Congress may take with respect to the SEC's
recommendation.
Navajo Nation
-------------
In July 1995, the Tribal Council of the Navajo Nation approved The
Navajo Nation Air Pollution Prevention and Control Act. Pursuant to this Act,
The Navajo Nation Environmental Protection Agency is authorized to promulgate
regulations which will regulate air emissions, including those from the Four
Corners Power Plant; however, until NNEPA does so, APS cannot predict what
impact, if any, the regulations will have on its operations or financial
position.
Item 6. Exhibits and Reports on Form 8-K
------------------------------------------
(a) Exhibits
Exhibit No. Description
---------- -----------
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1995 and the period ended August 11,
1995 the Company filed no reports on Form 8-K.
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.
PINNACLE WEST CAPITAL CORPORATION
(Registrant)
Dated: August 14, 1995 By: /s/ Nancy Newquist
--------------------
Nancy Newquist
(Vice President and Treasurer and
Officer Duly Authorized to sign
this Report)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-39208, 33-54287 and 33-54307 on Form S-8 of our report dated March 3, 1995
(which expresses an unqualified opinion and includes an explanatory paragraph
relating to the Company's change in method of accounting for income taxes
discussed in Note 3 to those financial statements), appearing in the Annual
Report on Form 10-K of Pinnacle West Capital Corporation for the year ended
December 31, 1994.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
August 11, 1995
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