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 September 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
--------------- ------------------
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 of (I.R.S. Employer
Incorporation or organization) Identification No.)
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 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 November 13, 1995: 87,429,375
<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
EPA - Environmental Protection Agency
EPEC - El Paso Electric Company
Four Corners - Four Corners Power Plant
ITCs - Investment tax credits
June 10-Q - Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1995
NGS - Navajo Generating Station
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"
Tribe - Navajo Tribe
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
September 30,
1995 1994
---- ----
Operating Revenues
Electric $ 549,082 $ 540,883
Real estate 9,709 13,473
------------ ------------
Total 558,791 554,356
------------ ------------
Fuel Expenses
Fuel for electric generation 68,715 70,035
Purchased power 23,539 25,532
------------ ------------
Total 92,254 95,567
------------ ------------
Operating Expenses
Utility operations and maintenance 97,565 102,944
Real estate operations 10,801 15,272
Depreciation and amortization 61,625 59,132
Taxes other than income taxes 35,498 36,005
------------ ------------
Total 205,489 213,353
------------ ------------
Operating Income 261,048 245,436
------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction 1,111 1,014
Interest on long-term debt (51,355) (63,021)
Other interest (5,400) (3,918)
Allowance for borrowed funds used
during construction 2,130 1,401
Preferred stock dividend requirements of APS (4,775) (5,908)
Other-net (13,128) (2,801)
------------ ------------
Total (71,417) (73,233)
------------ ------------
Income Before Income Taxes 189,631 172,203
Income Tax Expense 75,136 78,212
------------ ------------
Net Income $ 114,495 $ 93,991
============ ============
Average Common Shares Outstanding 87,414,951 87,409,343
Earnings Per Average Common Share Outstanding $ 1.31 $ 1.08
============ ============
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)
Nine Months Ended
September 30,
1995 1994
---- ----
Operating Revenues
Electric $ 1,266,228 $ 1,284,088
Real estate 31,873 38,333
------------ ------------
Total 1,298,101 1,322,421
------------ ------------
Fuel Expenses
Fuel for electric generation 160,248 188,093
Purchased power 49,563 51,899
------------ ------------
Total 209,811 239,992
------------ ------------
Operating Expenses
Utility operations and maintenance 283,248 309,009
Real estate operations 31,152 39,535
Depreciation and amortization 183,315 175,280
Taxes other than income taxes 106,654 107,370
------------ ------------
Total 604,369 631,194
------------ ------------
Operating Income 483,921 451,235
------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction 3,645 2,837
Palo Verde accretion income -- 33,596
Interest on long-term debt (158,952) (176,587)
Other interest (13,153) (11,882)
Allowance for borrowed funds used
during construction 6,481 3,918
Preferred stock dividend requirements of APS (14,358) (20,390)
Other-net (7,215) 17,524
------------ ------------
Total (183,552) (150,984)
------------ ------------
Income Before Income Taxes 300,369 300,251
Income Tax Expense 119,002 135,939
------------ ------------
Net Income $ 181,367 $ 164,312
============ ============
Average Common Shares Outstanding 87,404,258 87,415,344
Earnings Per Average Common Share Outstanding $ 2.08 $ 1.88
============ ============
Dividends Declared Per Share $ 0.675 $ 0.600
============ ============
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,
1995 1994
---- ----
Operating Revenues
Electric $ 1,608,308 $ 1,647,457
Real estate 52,793 50,412
------------ ------------
Total 1,661,101 1,697,869
------------ ------------
Fuel Expenses
Fuel for electric generation 209,258 242,319
Purchased power 61,250 65,595
------------ ------------
Total 270,508 307,914
------------ ------------
Operating Expenses
Utility operations and maintenance 386,160 423,766
Real estate operations 51,406 53,791
Depreciation and amortization 245,361 231,226
Taxes other than income taxes 141,210 141,728
------------ ------------
Total 824,137 850,511
------------ ------------
Operating Income 566,456 539,444
------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction 4,749 3,069
Palo Verde accretion income -- 53,058
Interest on long-term debt (212,175) (237,137)
Other interest (16,456) (15,427
Allowance for borrowed funds used
during construction 8,005 5,299
Preferred stock dividend requirements of APS (19,242) (28,399)
Other-net (7,630) 16,828
------------ ------------
Total (242,749) (202,709)
------------ ------------
Income Before Income Tax 323,707 336,735
------------ ------------
Income Tax Expense (Benefit)
Income tax expense 132,803 155,552
Non-recurring income tax benefit (26,770) --
------------ ------------
Total 106,033 155,552
------------ ------------
Net Income $ 217,674 $ 181,183
============ ============
Average Common Shares Outstanding 87,402,674 87,396,659
Earnings Per Average Common Share Outstanding $ 2.49 $ 2.07
============ ============
Dividends Declared Per Share $ 0.900 $ 0.800
============ ============
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,
1995 1994
------------- ------------
Current Assets
Cash and cash equivalents $ 52,891 $ 34,719
Customer and other receivables--net 168,229 136,143
Accrued utility revenues 78,851 55,432
Material and supplies 89,285 89,864
Fossil fuel 27,160 35,735
Deferred income taxes 55,463 68,263
Other current assets 17,595 15,422
---------- ----------
Total current assets 489,474 435,578
---------- ----------
Investments and Other Assets
Real estate investments--net 418,893 408,505
Other assets 154,756 153,384
---------- ----------
Total investments and other assets 573,649 561,889
---------- ----------
Utility Plant
Electric plant in service, including
nuclear fuel 6,727,865 6,602,799
Construction work in progress 246,515 224,312
---------- ----------
Total utility plant 6,974,380 6,827,111
Less accumulated depreciation and
amortization 2,346,527 2,203,038
---------- ----------
Net utility plant 4,627,853 4,624,073
---------- ----------
Deferred Debits
Regulatory asset for income taxes 544,080 557,049
Palo Verde Unit 3 cost deferral 285,716 292,586
Palo Verde Unit 2 cost deferral 167,389 171,936
Other deferred debits 277,404 266,641
---------- ----------
Total deferred debits 1,274,589 1,288,212
---------- ----------
Total Assets $6,965,565 $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)
September 30, December 31,
1995 1994
------------- ------------
Current Liabilities
Accounts payable $ 107,736 $ 126,842
Accrued taxes 207,192 89,144
Accrued interest 35,399 56,058
Short-term borrowings 62,200 131,500
Current maturities of long-term debt 77,624 78,512
Other current liabilities 68,575 50,060
---------- ----------
Total current liabilities 558,726 532,116
---------- ----------
Non-Current Liabilities
Long-term debt less current maturities 2,519,791 2,588,525
Other liabilities 11,659 8,679
---------- ----------
Total non-current liabilities 2,531,450 2,597,204
---------- ----------
Deferred Credits and Other
Deferred income taxes 1,299,137 1,297,298
Deferred investment tax credit 100,041 121,426
Unamortized gain - sale of utility plant 92,658 98,551
Other deferred credits 216,326 218,179
---------- ----------
Total deferred credits and other 1,708,162 1,735,454
---------- ----------
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 75,000 75,000
---------- ----------
Common Stock Equity
Common stock, no par value 1,641,075 1,641,196
Retained earnings 257,591 135,221
---------- ----------
Total common stock equity 1,898,666 1,776,417
---------- ----------
Total Liabilities and Equity $6,965,565 $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)
Nine Months Ended
September 30,
1995 1994
---- ----
Cash Flows From Operating Activities
Net income $ 181,367 $ 164,312
Items not requiring cash
Depreciation and amortization 208,171 199,585
Deferred income taxes--net 27,608 70,508
Revenue refund reversal -- (9,308)
Palo Verde accretion income -- (33,596)
Deferred Investment tax credit (21,385) (5,935)
Other--net 478 755
Changes in current assets and liabilities
Accounts receivable--net (32,175) (28,518)
Accrued utility revenues (23,419) (23,641)
Materials, supplies and fossil fuel 9,154 9,611
Other current assets (2,173) (2,029)
Accounts payable (8,171) 18,019
Accrued taxes 118,048 84,341
Accrued interest (20,659) (6,790)
Other current liabilities 17,934 (29,880)
Decrease (increase) in land held (12,322) (653)
Other--net 2,876 (10,968)
--------- ---------
Net Cash Flow Provided By Operating Activities 445,332 395,813
--------- ---------
Cash Flows From Investing Activities
Capital expenditures (219,597) (179,836)
Allowance for equity funds used during construction 3,645 2,837
Other--net (5,664) (3,982)
--------- ---------
Net Cash Flow Used For Investing Activities (221,616) (180,981)
--------- ---------
Cash Flows From Financing Activities
Issuance of long-term debt 102,740 528,668
Short-term borrowings--net (69,300) (112,500)
Dividends paid on common stock (58,998) (52,450)
Repayment of long-term debt (179,865) (449,810)
Redemption of preferred stock (4) (104,096)
Other--net (117) 1,915
--------- ---------
Net Cash Flow Used For Financing Activities (205,544) (188,273)
--------- ---------
Net Cash Flow 18,172 26,559
Cash and Cash Equivalents at Beginning of Period 34,719 52,127
--------- ---------
Cash and Cash Equivalents at End of Period $ 52,891 $ 78,686
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 180,366 $ 176,066
Income taxes $ 35,757 $ 26,100
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 year's 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 September 30, 1995, the results of
operations for the three months, nine months and twelve months ended September
30, 1995 and 1994, and the cash flows for the nine months ended September 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 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 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 40 years (until 2025 and 2027, respectively), although APS will
continue its normal periodic assessment of these steam generators.
8. El Paso Electric Company, one of the joint owners of Palo Verde and Four
Corners, has been operating under Chapter 11 of the Bankruptcy Code since 1992.
On September 29, 1995 EPEC filed with the bankruptcy court a revised plan
whereby, among other things, certain issues, including EPEC allegations against
APS regarding the 1989-90 Palo Verde outages, will be resolved, and EPEC will
assume the joint facilities operating agreements. If the plan is not approved,
APS does not expect that there would be a material adverse effect on its
operations or financial position.
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- -------------
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 September 1995, Pinnacle West prepaid $16.2 million of its debt,
reducing Pinnacle West's outstanding debt to approximately $382 million.
Pinnacle West anticipates incurring substantial prepayment penalties in the
refinancing of up to $100 million of long term-debt in December, 1995. Pinnacle
West anticipates that its year-end debt balance will be approximately $310
million.
The Board declared a quarterly dividend of 25 cents per share of common
stock, payable December 1, 1995 to shareholders of record on November 1, 1995,
totaling approximately $21.9 million.
APS
- ---
For the nine months ended September 30, 1995, APS incurred approximately
$200 million in construction expenditures, accounting for approximately 71% of
the most recently estimated 1995 construction expenditures. APS has estimated
total construction expenditures for the years 1995, 1996 and 1997 to be
approximately $280 million, $244 million, and $223 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 $14 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 $23 million of its
First Mortgage 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 $130 million, $4
million, and $164 million for the years 1995, 1996, and 1997, respectively.
During the first nine months of 1995, APS refunded approximately $130 million
(100%) 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 September 30, 1995, and adjusting for the repurchase and
incurrence of approximately $9 million and $4 million, respectively, of
long-term debt in connection with a tax-exempt financing, APS estimates that the
mortgage bond indenture and the articles of incorporation would have allowed APS
to issue up to approximately $1.501 billion and $1.028 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 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, nine-month and twelve-month periods ended
September 30, 1995 and 1994:
<PAGE>
<TABLE>
Income (Loss)
(Unaudited)
(Thousands of Dollars)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
1995 1994 1995 1994 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
APS $ 123,570 $ 110,359 $ 205,271 $ 200,196 $ 223,287 $ 231,132
SunCor (1,555) (693) (201) (129) 467 (1,932)
El Dorado (99) (3,300) 304 (4,183) 480 (4,617)
Pinnacle West(1) (7,421) (12,375) (24,007) (31,572) (6,560) (43,400)
--------- --------- --------- --------- --------- ---------
NET INCOME $ 114,495 $ 93,991 $ 181,367 $ 164,312 $ 217,674 $ 181,183
========= ========= ========= ========= ========= =========
(1) Includes Pinnacle West's interest expense and operating expenses net of
income tax benefits. Income tax benefits are as follows (in thousands):
$3,841 and $9,333 for the three months ended September 30, 1995 and 1994
respectively; $11,969 and $22,697 for the nine months ended September
30, 1995 and 1994, respectively; and $43,569 and $31,844 for the twelve
months ended September 30, 1995 and 1994, respectively.
</TABLE>
<PAGE>
APS
- ---
Operating Results - Three-month period ended September 30, 1995 compared to
three-month period ended September 30, 1994
Earnings increased in the three-month period ended September 30, 1995
primarily due to the accelerated amortization of investment tax credits,
customer growth, and lower operations and maintenance expenses. The accelerated
investment tax credit amortization was a result of the 1994 rate settlement (see
Note 5 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1
of this report) and is reflected as a decrease to income tax expense. Operations
and maintenance expenses decreased due to various cost reductions. Partially
offsetting these positive factors were the write-down of an office building and
milder weather.
Operating Results - Nine-month period ended September 30, 1995 compared to
nine-month period ended September 30, 1994
Earnings increased in the nine-month period ended September 30, 1995
primarily due to customer growth, accelerated investment tax credit
amortization, lower fuel costs, lower operations and maintenance expenses, lower
preferred stock dividends, and a gain recognized on the sale of a small
subsidiary. The accelerated investment tax credit amortization was a result of
the 1994 rate settlement (see Note 5 of Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this report) and is reflected as a
decrease to income tax expense. Fuel expense decreased due largely to lower fuel
prices and lower average fuel costs resulting from increased nuclear generation.
Operations and maintenance expenses were down due to improved nuclear
operations, employee severance costs incurred in 1994 and lower fossil plant
overhaul costs. Preferred stock dividends decreased due to less preferred stock
outstanding. Partially offsetting these positive factors were 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), milder weather, the reversal in 1994 of
certain previously-recorded depreciation related to Palo Verde, a retail rate
reduction which became effective June 1, 1994, and the write-down of an office
building.
Operating Results - Twelve-month period ended September 30, 1995 compared to
twelve-month period ended September 30, 1994
Earnings decreased in the twelve-month period ended September 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), milder
weather, 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, increased depreciation expense, and the write-down of an
office building. Depreciation expense increased primarily due to higher plant
balances and higher depreciation rates. 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
improved nuclear operations and lower fossil plant overhaul costs. Fuel expense
was down due largely to lower average fuel costs resulting from increased
nuclear generation and lower fuel prices. 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.
Non-utility Operations
- ----------------------
Pinnacle West's interest expense decreased due to repayment of debt and prior
year prepayment penalty in the three-month, nine-month and twelve-month periods.
Earnings increased in the twelve-month period due to a non-recurring income tax
benefit of approximately $26.8 million related to change in tax law.
SunCor's earnings decreased in the three-month and nine-month periods due to
decreased land sales. The twelve-month period earnings increased as a result of
increased net commercial and property management income.
El Dorado's earnings increased in all periods presented due to loss reserves in
prior year periods and sale of stock on venture capital investments in the
nine-month and twelve-month periods.
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.
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 anticipates filing recommendations with
the ACC in late 1995. A separate ACC proceeding on competition was opened by the
ACC in mid-1994 and is ongoing.
As the forces of competition continue to impact the industry, it will become
clearer as to what customer sectors and what regions will be most affected and
what strategies are best to deal with those forces.
<PAGE>
PART II. OTHER INFORMATION
The following information relates primarily to Pinnacle West (the "Company")
and its principal subsidiary, Arizona Public Service Company ("APS").
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.
Navajo Nation
-------------
Four Corners Power Plant and Navajo Generating Station are located on
the Navajo Reservation and are held under easements granted by the federal
government as well as leases from the Navajo Tribe. APS is the Four Corners
operating agent and owns a 100% interest in Four Corners Units 1, 2 and 3, and
a 15% interest in Four Corners Units 4 and 5. APS owns a 14% interest in NGS
Units 1, 2, and 3. In July 1995 the Navajo Nation enacted the Navajo Nation
Air Pollution Prevention and Control Act, the Navajo Nation Safe Drinking
Water Act, and the Navajo Nation Pesticide Act (collectively, the "Acts"). See
"Navajo Nation" in Part II, Item 5 of the June 10-Q. By separate letters dated
October 12 and October 13, 1995 the Four Corners participants and the NGS
participants requested the United States Secretary of the Interior to resolve
their dispute with the Tribe regarding whether or not the Acts apply to
operations of NGS and Four Corners. On October 17, 1995 the Four Corners
participants and the NGS participants each filed a lawsuit in the District
Court of the Navajo Nation, Window Rock District, seeking, among other things,
a declaratory judgment that (i) their respective leases and federal easements
preclude the application of the Acts to the operations of Four Corners and
NGS, and (ii) the Navajo Nation and its agencies and courts lack adjudicatory
jurisdiction to determine the enforceability of the Acts as applied to Four
Corners and NGS. On October 18, 1995, the Tribe and the Four Corners and NGS
participants agreed to indefinitely stay the proceedings referenced in the
preceding two sentences so that the parties may attempt to resolve the dispute
without litigation, and the parties have requested that the Secretary and the
Court stay these proceedings. APS cannot currently predict the outcome of this
matter.
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
In addition to the Exhibit shown above, the Company hereby incorporates the
following Exhibits pursuant to Exchange Act Rule 12b-32 by reference to the
filings set forth below:
Exhibit Previously Filed File Date
No. Description As Exhibit No. Effective
- ------- ----------- ---------------- ---- ---------
10.1 Letter Agreement 10.1 to APS' 1-4473 11/14/95
dated July 28, 1995 September 1995
between APS and Jaron 10-Q Report
B. Norberg regarding
certain of Mr. Norberg's
retirment benefits
10.2 Second Amendment to 10.2 to APS' 1-4473 11/14/95
Pinnacle West Capital September 1995
Corporation, Arizona 10-Q Report
Public Service
Company, SunCor
Development Company
and El Dorado
Investment Company
Deferred Compensation
Plan, effective as of
January 1, 1994
10.3 Amendment to Pinnacle 10.3 to APS' 1-4473 11/14/95
West Capital September 1995
Corporation, Arizona 10-Q Report
Public Service
Company, SunCor
Development Company
and El Dorado
Investment Company
Deferred Compensation
Plan, effective as of
December 1, 1994
10.4 Amendment No. 4 to 10.4 to APS' 1-4473 11/14/95
Pinnacle West Capital September 1995
Corporation, Arizona 10-Q Report
Public Service
Company, SunCor
Development Company
and El Dorado
Investment Company
Deferred Compensation
Plan, effective as of
May 17, 1995
(b) Reports on Form 8-K
During the quarter ended September 30, 1995, and the period ended
November 13, 1995, the Company filed no reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities 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: November 14, 1995 By: /s/ Nancy Newquist
------------------
Nancy Newquist
Vice President and Treasurer
(Principal Financial Officer and Officer
Duly Authorized to sign this Report)
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
Public Utility Companies and Public Utility Holding Companies
(Thousands of Dollars)
Fiscal year ended December 31, 1995
For Period January 1, 1995 through September 30, 1995
Nine Months Ended
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,627,853
<OTHER-PROPERTY-AND-INVEST> 573,649
<TOTAL-CURRENT-ASSETS> 489,474
<TOTAL-DEFERRED-CHARGES> 1,274,589
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,965,565
<COMMON> 1,641,075
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 257,591
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,898,666
75,000
193,561
<LONG-TERM-DEBT-NET> 2,519,791
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 62,200
<LONG-TERM-DEBT-CURRENT-PORT> 77,624
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,138,723
<TOT-CAPITALIZATION-AND-LIAB> 6,965,565
<GROSS-OPERATING-REVENUE> 1,298,101
<INCOME-TAX-EXPENSE> 119,002
<OTHER-OPERATING-EXPENSES> 604,369
<TOTAL-OPERATING-EXPENSES> 814,180
<OPERATING-INCOME-LOSS> 483,921
<OTHER-INCOME-NET> (183,552)
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 165,624
<NET-INCOME> 181,367
0
<EARNINGS-AVAILABLE-FOR-COMM> 181,367
<COMMON-STOCK-DIVIDENDS> 58,998
<TOTAL-INTEREST-ON-BONDS> 155,069
<CASH-FLOW-OPERATIONS> 445,332
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 0
</TABLE>
