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, 1996
-----------------------------
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)
<TABLE>
<S> <C>
Registrant's telephone number, including area code: (602) 379-2500
- - ----------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last report)
</TABLE>
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 12, 1996: 87,418,327
<PAGE>
- i -
Glossary
--------
ACC -- Arizona Corporation Commission
ACC Order -- ACC Order commencing a formal rulemaking process for
the adoption of proposed rules regarding the
introduction of retail electric competition in
Arizona
ACC Staff -- Staff of the Arizona Corporation Commission
AFUDC -- Allowance for funds used during construction
Affected Utilities -- Utilities affected by the ACC's Proposed Rules on
retail electric competition in Arizona
APS -- Arizona Public Service Company
CC&N -- Certificate of convenience and necessity
Company -- Pinnacle West Capital Corporation
El Dorado -- El Dorado Investment Company
EPA -- Environmental Protection Agency
ITCs -- Investment tax credits
June 10-Q -- Pinnacle West Capital Corporation Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1996
1995 10-K -- Pinnacle West Capital Corporation Annual Report on
Form 10-K for the fiscal year ended December 31, 1995
Palo Verde -- Palo Verde Nuclear Generating Station
Proposed Rules -- Proposed rules issued by the ACC regarding the
introduction of retail electric competition in
Arizona
Pinnacle West -- Pinnacle West Capital Corporation
SEC -- Securities and Exchange Commission
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)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 566,899 $ 549,082
Real estate 31,892 9,709
------------ ------------
Total 598,791 558,791
------------ ------------
Fuel Expenses
Fuel for electric generation 68,243 68,715
Purchased power 39,793 23,539
------------ ------------
Total 108,036 92,254
------------ ------------
Operating Expenses
Utility operations and maintenance 100,386 97,565
Real estate operations 28,396 10,801
Depreciation and amortization 91,144 61,625
Taxes other than income taxes 25,029 35,498
------------ ------------
Total 244,955 205,489
------------ ------------
Operating Income 245,800 261,048
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction 1,942 1,111
Interest on long-term debt (41,366) (51,355)
Other interest (6,824) (5,400)
Allowance for borrowed funds used during construction 2,021 2,130
Preferred stock dividend requirements of APS (4,153) (4,775)
Other-net (272) (13,128)
------------ ------------
Total (48,652) (71,417)
------------ ------------
Income Before Income Taxes and Extraordinary Charge 197,148 189,631
Income Tax Expense 75,742 75,136
------------ ------------
Income Before Extraordinary Charge 121,406 114,495
Extraordinary Charge for Early Retirement of Debt,
Net of Income Tax of $9,667 (14,272) --
------------ ------------
Net Income $ 107,134 $ 114,495
============ ============
Average Common Shares Outstanding 87,439,830 87,414,951
Earnings Per Average Common Share Outstanding:
Income Before Extraordinary Charge $ 1.39 $ 1.31
Extraordinary Charge (0.16) --
------------ ------------
Total $ 1.23 $ 1.31
============ ============
Dividends Declared Per Share $ 0.275 $ 0.225
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 1,338,818 $ 1,266,228
Real estate 74,036 31,873
------------ ------------
Total 1,412,854 1,298,101
------------ ------------
Fuel Expenses
Fuel for electric generation 167,866 160,248
Purchased power 76,197 49,563
------------ ------------
Total 244,063 209,811
------------ ------------
Operating Expenses
Utility operations and maintenance 288,425 283,248
Real estate operations 71,749 31,152
Depreciation and amortization 209,421 183,315
Taxes other than income taxes 94,740 106,654
------------ ------------
Total 664,335 604,369
------------ ------------
Operating Income 504,456 483,921
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction 5,620 3,645
Interest on long-term debt (131,950) (158,952)
Other interest (17,871) (13,153)
Allowance for borrowed funds used during construction 7,422 6,481
Preferred stock dividend requirements of APS (12,956) (14,358)
Other-net 415 (7,215)
------------ ------------
Total (149,320) (183,552)
------------ ------------
Income Before Income Taxes and Extraordinary Charge 355,136 300,369
Income Tax Expense 137,417 119,002
------------ ------------
Income Before Extraordinary Charge 217,719 181,367
Extraordinary Charge for Early Retirement of Debt,
Net of Income Tax of $13,777 (20,340) --
------------ ------------
Net Income $ 197,379 $ 181,367
============ ============
Average Common Shares Outstanding 87,436,827 87,404,258
Earnings Per Average Common Share Outstanding:
Income Before Extraordinary Charge $ 2.49 $ 2.08
Extraordinary Charge (0.23) --
------------ ------------
Total $ 2.26 $ 2.08
============ ============
Dividends Declared Per Share $ 1.025 $ 0.675
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve Months Ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 1,687,542 $ 1,608,308
Real estate 97,009 52,793
------------ ------------
Total 1,784,551 1,661,101
------------ ------------
Fuel Expenses
Fuel for electric generation 216,546 209,258
Purchased power 87,504 61,250
------------ ------------
Total 304,050 270,508
------------ ------------
Operating Expenses
Utility operations and maintenance 405,991 386,160
Real estate operations 90,941 51,406
Depreciation and amortization 270,095 245,361
Taxes other than income taxes 130,515 141,210
------------ ------------
Total 897,542 824,137
------------ ------------
Operating Income 582,959 566,456
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction 6,957 4,749
Interest on long-term debt (182,291) (212,175)
Other interest (21,693) (16,456)
Allowance for borrowed funds used during construction 10,006 8,005
Preferred stock dividend requirements of APS (17,732) (19,242)
Other-net 4,134 (7,630)
------------ ------------
Total (200,619) (242,749)
------------ ------------
Income Before Income Taxes and Extraordinary Charge 382,340 323,707
------------ ------------
Income Taxes
Income tax expense 146,380 132,803
Non-recurring income tax benefit -- (26,770)
------------ ------------
Total 146,380 106,033
------------ ------------
Income Before Extraordinary Charge 235,960 217,674
Extraordinary Charge for Early Retirement of Debt,
Net of Income Tax of $21,611 (31,911) --
------------ ------------
Net Income $ 204,049 $ 217,674
============ ============
Average Common Shares Outstanding 87,443,641 87,402,674
Earnings Per Average Common Share Outstanding:
Income Before Extraordinary Charge $ 2.69 $ 2.49
Extraordinary Charge (0.36) --
------------ ------------
Total $ 2.33 $ 2.49
============ ============
Dividends Declared Per Share $ 1.275 $ 0.900
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
ASSETS
------
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 64,408 $ 79,539
Customer and other receivables--net 171,411 131,393
Accrued utility revenues 74,008 53,519
Material and supplies 75,871 78,271
Fossil fuel 15,188 21,722
Deferred income taxes 46,316 46,355
Other current assets 31,006 19,671
---------- ----------
Total current assets 478,208 430,470
---------- ----------
Investments and Other Assets
Real estate investments--net 400,038 411,693
Other assets 173,636 151,127
---------- ----------
Total investments and other assets 573,674 562,820
---------- ----------
Utility Plant
Electric plant in service and held for future use 6,683,761 6,544,860
Less accumulated depreciation and
amortization 2,389,447 2,231,614
---------- ----------
Total 4,294,314 4,313,246
Construction work in progress 307,251 281,757
Nuclear fuel, net of amortization 49,829 52,084
---------- ----------
Net utility plant 4,651,394 4,647,087
---------- ----------
Deferred Debits
Regulatory asset for income taxes 520,910 548,464
Palo Verde Unit 3 cost deferral 270,131 283,426
Palo Verde Unit 2 cost deferral 157,754 165,873
Other deferred debits 360,614 358,912
---------- ----------
Total deferred debits 1,309,409 1,356,675
---------- ----------
Total Assets $7,012,685 $6,997,052
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
LIABILITIES AND EQUITY
----------------------
(Thousands of Dollars)
September 30, December 31,
1996 1995
------------ -----------
Current Liabilities
Accounts payable $ 124,847 $ 114,963
Accrued taxes 191,823 95,962
Accrued interest 29,509 48,958
Dividends payable 24,067 --
Short-term borrowings 310,689 177,800
Current maturities of long-term debt 169,409 8,780
Customer deposits 34,209 32,746
Other current liabilities 40,363 25,284
---------- ----------
Total current liabilities 924,916 504,493
---------- ----------
Long-Term Debt Less Current Maturities 2,078,869 2,510,709
---------- ----------
Deferred Credits and Other
Deferred income taxes 1,316,707 1,327,881
Deferred investment tax credit 75,653 97,897
Unamortized gain - sale of utility plant 88,083 91,514
Other 315,218 314,910
---------- ----------
Total deferred credits and other 1,795,661 1,832,202
---------- ----------
Commitments and Contingencies (Notes 5, 6 and 7)
Minority Interests
Non-redeemable preferred stock of APS 170,391 193,561
---------- ----------
Redeemable preferred stock of APS 53,000 75,000
---------- ----------
Common Stock Equity
Common stock, no par value 1,639,709 1,638,684
Retained earnings 350,139 242,403
---------- ----------
Total common stock equity 1,989,848 1,881,087
---------- ----------
Total Liabilities and Equity $7,012,685 $6,997,052
========== ==========
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before extraordinary charge $ 217,719 $ 181,367
Items not requiring cash
Depreciation and amortization 235,600 208,171
Deferred income taxes--net 3,195 27,608
Allowance for equity funds used during construction (5,620) (3,645)
Deferred investment tax credit (22,244) (21,385)
Other--net (459) 4,123
Changes in current assets and liabilities
Customer and other receivable--net (39,756) (32,175)
Accrued utility revenues (20,489) (23,419)
Materials, supplies and fossil fuel 8,934 9,154
Other current assets (591) (2,173)
Accounts payable 9,004 (8,171)
Accrued taxes 95,861 118,048
Accrued interest (19,449) (20,659)
Other current liabilities 20,421 17,934
Decrease (increase) in land held 16,043 (12,322)
Other--net 7,401 2,876
--------- ---------
Net Cash Flow Provided By Operating Activities 505,570 445,332
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (196,641) (209,471)
Allowance for borrowed funds used during construction (7,422) (6,481)
Other--net (21,649) (5,664)
--------- ---------
Net Cash Flow Used For Investing Activities (225,712) (221,616)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 112,765 102,740
Short-term borrowings--net 132,889 (69,300)
Dividends paid on common stock (65,576) (58,998)
Repayment of long-term debt (410,582) (179,865)
Redemption of preferred stock (46,083) (4)
Extraordinary charge for early retirement of debt (20,340) --
Other--net 1,938 (117)
--------- ---------
Net Cash Flow Used For Financing Activities (294,989) (205,544)
--------- ---------
Net Cash Flow (15,131) 18,172
Cash and Cash Equivalents at Beginning of Period 79,539 34,719
--------- ---------
Cash and Cash Equivalents at End of Period $ 64,408 $ 52,891
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 155,943 $ 180,366
Income taxes $ 72,224 $ 35,757
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements include the accounts of
Pinnacle West and its subsidiaries: APS, SunCor and El Dorado. All significant
intercompany balances have been eliminated. Certain prior year balances have
been restated to conform to the current year presentation.
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, 1996, the results of
operations for the three months, nine months and twelve months ended September
30, 1996 and 1995, and the cash flows for the nine months ended September 30,
1996 and 1995. 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 1995 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 for the nine months ended September 30, 1996.
5. Regulatory Matters
Regulatory Agreement
In April 1996 the ACC approved a regulatory agreement between APS and
the ACC Staff. This agreement is substantially the same as the agreement
proposed by APS and the ACC Staff in December 1995. The major provisions of the
1996 regulatory agreement are:
- - - An annual rate reduction of approximately $48.5 million ($29 million after
income taxes), or an average 3.4% for all customers except certain contract
customers, effective July 1, 1996.
- - - Recovery of substantially all of APS' present regulatory assets through
accelerated amortization over an eight-year period beginning July 1, 1996,
increasing annual amortization by approximately $120 million ($72 million
after income taxes).
7
<PAGE>
- - - A formula for sharing future cost savings between customers and
shareholders, referencing a return on equity (as defined) of 11.25%.
- - - A moratorium on filing for permanent rate changes, except under the sharing
formula and under certain other limited circumstances, prior to July 2,
1999.
- - - Infusion of $200 million of common equity into APS by the parent company,
in annual increments of $50 million starting in 1996.
Competition and Electric Industry Restructuring
In recognition of evolving competition in the electric utility
industry, there has been an ongoing investigation by the ACC Staff into industry
restructuring in an open competition docket involving many parties. See Note 3
of Notes to Consolidated Financial Statements in Part II, Item 8 of the 1995
10-K for further discussion of industry restructuring. On October 9, 1996 the
ACC issued an order (the "ACC Order"), attached hereto and incorporated herein
by reference, initiating a formal rulemaking process for the adoption of rules
("Proposed Rules") regarding the introduction of retail electric competition in
Arizona. The ACC will hold public comment meetings on the Proposed Rules on
December 2, 3 and 4, 1996. The ACC has indicated that, even if it then adopts
the Proposed Rules, issues such as reliability, stranded cost recovery , the
phase-in process, and bundled, unbundled and metering services, as well as legal
issues, will require additional consideration and will be addressed through
workshops and working groups which will issue recommendations to the ACC during
1997. Commissioner Carl Kunasek, the sole Republican on the three-member ACC,
provided a concurring statement to the ACC Order in which he expressed concerns
about the Proposed Rules and his intent to make substantive changes in them. As
a result of the recent election, Mr. Kunasek will be joined on the ACC in
January 1997 by Republican Jim Irvin, which will impact the leadership of the
ACC and the composition of the ACC Staff. The positions on the rulemaking that
will actually be taken by the members of the ACC, as evidenced by recently
reported comments, are by no means clear at this time.
The Proposed Rules include the following major provisions:
- - - The Proposed Rules are intended to apply to virtually all of the Arizona
electric utilities regulated by the ACC (the "Affected Utilities"),
including APS.
- - - Each Affected Utility would be required to make available at least 20
percent of its 1995 system retail peak demand for competitive generation
supply to all customer classes not later than January 1, 1999, at least 50
percent not later than January 1, 2001, and all of its retail demand not
later than January 1, 2003.
- - - "Electric Service Providers" that obtain a "Certificate of Convenience and
Necessity" ("CC&N") from the ACC would be allowed to supply, market and or
broker specified electric services at retail. These services would not
include most electric distribution services. Affected Utilities would not
be required to apply for CC&N's for any services provided in their existing
service territories.
- - - On or before December 31, 1997 each Affected Utility would file with the
ACC proposed tariffs for "Standard Offer Bundled Service" and "Unbundled
Service."
8
<PAGE>
"Standard Offer Bundled Service" means electric service elements (i.e.,
generation, transmission, distribution and ancillary services) provided and
priced as a package to consumers within a designated area. "Unbundled
Service" means electric service elements provided and priced separately.
The Proposed Rules indicate that the ACC shall allow recovery by
Affected Utilities of unmitigated Stranded Cost, defined as "the verifiable net
difference between (a) the value of all prudent jurisdictional assets and
obligations necessary to furnish electricity (such as generating plants,
purchased power contracts, fuel contracts, and regulatory assets), acquired or
entered into prior to the adoption of the [Proposed Rules], and (b) the market
value of those assets and obligations directly attributable to the introduction
of competition under the [Proposed Rules]." Each Affected Utility would be
required to take "every feasible, cost-effective measure" to mitigate or offset
Stranded Cost and to file with the ACC estimates of unmitigated Stranded Cost.
The ACC would then, after hearing and consideration of various factors,
determine the magnitude of Stranded Cost and appropriate Stranded Cost recovery
mechanisms and charges on a case-by-case basis.
In comments submitted to the ACC, APS has stated that certain
provisions of the Proposed Rules are deficient, legally and otherwise, because,
among other things, (i) the ACC has no authority to require or authorize retail
competition between electric utilities or to regulate non-public service
corporations; (ii) the rules fail to address the vested property rights of
Affected Utilities, including APS, to receive adequate compensation for the
amendment or rescission of CC&N's or for stranded costs; (iii) the rules are
discriminatory because they favor newly-certificated competitors over Affected
Utilities; (iv) the rules do not provide for the fundamental statutory and due
process rights of APS and other Affected Utilities; (v) specific measures of the
Proposed Rules, including the proposed phase-in, could affect APS' ability to
maintain system reliability in a cost-effective manner; and (vi) the status of
certain of APS' potential competitors, including public power entities and
out-of-state utilities, is unclear.
In April 1996 an Arizona law established legislative and advisory
committees to study electric utility industry restructuring issues and report
back to the legislature by the end of 1997. The committees include
representatives of the ACC and APS.
The Company believes that legislation will ultimately be required
before significant implementation of the Proposed Rules (or whatever they may
evolve into) can lawfully occur.
6. The Palo Verde participants have insurance for public liability payments
resulting from nuclear energy hazards to the full limit of liability under
federal law. This potential liability is covered by primary liability insurance
provided by commercial insurance carriers in the amount of $200 million and the
balance by an industry-wide retrospective assessment program. If losses at any
nuclear power plant covered by this program exceed the accumulated funds for
this program, APS could be assessed retrospective premium adjustments. The
maximum assessment per reactor under the program for each nuclear incident is
approximately $79 million, subject to an annual limit of $10 million per
incident. Based upon APS' 29.1% interest in the three Palo Verde units,
9
<PAGE>
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 $2.75 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 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 1996 dollars and including installation and
replacement power costs) will be approximately $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 the license periods (until 2025 and 2027, respectively), although APS will
continue its normal periodic assessment of these steam generators.
10
<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
Parent Company
- - --------------
The parent company'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 1995 10-K.
During August, Pinnacle West prepaid the remaining $150 million of
11.61% bond debentures due March 2000, incurring an extraordinary charge of
$14.3 million after income taxes. Proceeds for the debt prepayment and penalty
came from a short-term borrowing that will be refinanced with long-term debt at
a later date.
As a result of the 1996 regulatory agreement (see Note 5 of Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this report),
the parent company will infuse $200 million into APS, in annual increments of
$50 million starting in 1996.
The Board declared a quarterly dividend of 27.5 cents per share of
common stock, payable December 2, 1996 to shareholders of record on November 1,
1996, totaling approximately $24.1 million.
APS
- - ---
For the nine months ended September 30, 1996, APS incurred
approximately $197 million in capital expenditures, accounting for approximately
76% of the most recently estimated 1996 capital expenditures. APS has estimated
total capital expenditures for the years 1996, 1997 and 1998 to be
approximately $260 million, $284 million and $284 million, respectively. These
amounts include about $30 million each year for nuclear fuel expenditures.
Required and optional redemptions of preferred stock and long-term
debt, including premiums thereon, and a capitalized lease obligation are
expected to total approximately $217 million, $164 million and $114 million for
the years 1996, 1997 and 1998, respectively. During the nine months ended
September 30, 1996, APS redeemed approximately $171 million of its long-term
debt and approximately $46 million of its preferred stock, and incurred $100
million of long-term debt under a
11
<PAGE>
revolving credit agreement. It is APS' intention over the next several years to
use excess cash flow primarily to retire debt and preferred stock.
Although provisions in APS' bond indenture, articles of incorporation
and financing orders from the ACC restrict the issuance of additional first
mortgage bonds and preferred stock, management does not expect any of these
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, 1996 and 1995:
12
<PAGE>
Income (Loss)
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
1996 1995 1996 1995 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
APS $ 124,331 $ 123,570 $ 231,574 $ 205,271 $ 246,739 $ 223,287
SunCor 2,278 (1,555) 1,186 (201) 5,465 467
El Dorado (231) (99) (270) 304 7,933 480
Pinnacle West (1) (19,244) (7,421) (35,111) (24,007) (56,088) (6,560)
========= ========= ========= ========= ========= =========
NET INCOME $ 107,134 $ 114,495 $ 197,379 $ 181,367 $ 204,049 $ 217,674
========= ========= ========= ========= ========= =========
</TABLE>
(1) Includes Pinnacle West's interest expense, extraordinary charge for
early retirement of debt and operating expenses net of income tax
benefits. Income tax benefits are as follows (in thousands): $9,997 and
$3,841 for the three months ended September 30, 1996 and 1995,
respectively; and $18,271 and $11,969 for the nine months ended
September 30, 1996 and 1995, respectively; and $27,409 and $43,569 for
the twelve months ended September 30, 1996 and 1995, respectively.
13
<PAGE>
APS
- - ---
Operating Results - Three-month period ended September 30, 1996 compared to
three-month period ended September 30, 1995
Earnings were flat in the three-month period ended September 30, 1996.
Results were favorably impacted by increased operating revenues, the write-down
of an office building in 1995, lower property taxes, and lower interest expense.
Operating revenues were higher due to customer growth, warmer weather and higher
residential usage. Property tax estimates for 1996 were reduced in the third
quarter to reflect a change in tax law. See "Property Taxes" in Part II, Item 1
of the June 10-Q. Interest expense decreased due to lower average interest rates
and lower debt balances.
Substantially offsetting these positive factors were the accelerated
amortization of regulatory assets, a retail rate reduction, and an increase in
fuel expenses. The accelerated regulatory asset amortization and the rate
reduction were part of a regulatory agreement which became effective July 1,
1996. See Note 5 of Notes to Condensed Consolidated Financial Statements. Fuel
expenses were higher primarily due to higher natural gas costs, a less favorable
mix of fuel and purchased power, and increased retail sales.
Operating Results - Nine-month period ended September 30, 1996 compared to
nine-month period ended September 30, 1995
Earnings increased in the nine-month period ended September 30, 1996
primarily due to increased operating revenues, the write-down of an office
building in 1995, a reduction in property taxes (see "Property Taxes" in Part
II, Item 1 of the June 10-Q), and lower interest expense. Operating revenues
were higher due to customer growth, warmer weather, and higher residential
usage. Interest expense decreased due to lower average interest rates and lower
debt balances.
Partially offsetting these positive factors were an increase in fuel
expenses, the accelerated amortization of regulatory assets, a retail rate
reduction, and a gain on the sale of a small subsidiary in the first quarter of
1995. Fuel expenses were higher primarily due to higher natural gas costs,
increased retail sales, higher coal prices, and a less favorable mix of fuel and
purchased power. The accelerated regulatory asset amortization and the rate
reduction were part of a regulatory agreement which became effective July 1,
1996. See Note 5 of Notes to Condensed Consolidated Financial Statements.
14
<PAGE>
Operating Results - Twelve-month period ended September 30, 1996 compared to
twelve-month period ended September 30, 1995
Earnings increased in the twelve-month period ended September 30, 1996
primarily due to increased operating revenues, the write-down of an office
building in 1995, a reduction in property taxes (see "Property Taxes" in Part
II, Item 1 of the June 10-Q), and lower interest expense. Operating revenues
were higher due to customer growth, warmer weather, and higher residential
usage. Interest expense decreased due to lower average interest rates and lower
debt balances.
Partially offsetting these positive factors were an increase in fuel
expenses, the accelerated amortization of regulatory assets, increased operation
and maintenance expenses, a retail rate reduction, and a gain on the sale of a
small subsidiary in the first quarter of 1995. Fuel expenses were higher
primarily due to increased retail sales, higher natural gas costs, a less
favorable mix of fuel and purchased power, and higher coal prices. The
accelerated regulatory asset amortization and the rate reduction were part of a
regulatory agreement which became effective July 1, 1996. See Note 5 of Notes to
Condensed Consolidated Financial Statements. Operations and maintenance expenses
were higher primarily due to the write-down of certain inventory in the fourth
quarter of 1995.
Non-utility Operations
- - ----------------------
The parent company incurred extraordinary charges for the prepayment of
debt in the three-month, nine-month and twelve-month periods. Interest expense
decreased in all periods due primarily to debt reduction. Additionally, the
parent company's income tax benefit decreased in the twelve-month period due to
a 1994 non-recurring income tax benefit of approximately $26.8 million related
to a change in tax law.
SunCor's earnings increased in the three-month, nine-month and
twelve-month periods due to an increase in net land sales.
El Dorado's decrease in earnings in the nine-month period was the
result of a 1995 gain on a sale of an investment. Earnings in the twelve-month
period increased due to the sale of an investment in the fourth quarter of 1995.
Other Income
- - ------------
Other income reflects accounting practices required for regulated
public utilities and represents a composite of cash and non-cash items,
including AFUDC. See Note 1 of Notes to Consolidated Financial Statements in
Part II, Item 8 of the 1995 10-K.
As part of a 1994 rate settlement agreement with the ACC, the Company
accelerated amortization of substantially all deferred ITCs over a five-year
period beginning in 1995, resulting in a decrease in annual consolidated income
tax expense of approximately $18 million.
15
<PAGE>
Voluntary Severance Program
- - ---------------------------
APS will take a charge in the fourth quarter of 1996 for a voluntary
severance program. Employees may submit their request to participate in the
program from October 15 through November 15, 1996. APS cannot currently estimate
the financial impact of this program.
Regulatory Agreement
- - --------------------
See Note 5 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report and Note 3 of Notes to Consolidated Financial
Statements in Part II, Item 8 of the 1995 10-K for a discussion of APS'
regulatory agreement and the Proposed Rules regarding the introduction of retail
electric competition in Arizona.
16
<PAGE>
PART II. OTHER INFORMATION
--------------------------
The following information relates primarily to Pinnacle West and its
principal subsidiary, APS.
ITEM 5. Other Information
- - --------------------------
Environmental Matters
---------------------
As previously reported, the Clean Air Act Amendments of 1990 required
two studies with respect to hazardous air pollutants emitted by electric utility
steam generating units. See "Environmental Matters -- EPA Environmental
Regulation" in Part I, Item 1 of the 1995 10-K. The EPA has postponed, for up to
three years, the general study concerning the necessity of regulating such units
and has deferred promulgating regulations relating to mercury emissions.
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.
Competition and Electric Industry Restructuring
-----------------------------------------------
See Note 5 of the Notes to Condensed Consolidated Financial Statements
in Part I, Item 1 of this report for a discussion of competition and the
Proposed Rules regarding the introduction of retail electric competition in
Arizona.
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:
Previously Filed File Date
Exhibit No. Description As Exhibit No. Effective
- - ----------- ----------- ---------------- ---- ---------
10.1 ACC Order dated 10.1 to APS' 1-4473 11/14/96
October 9, 1996 September 1996
Form 10-Q Report
17
<PAGE>
(b) Reports on Form 8-K
During the quarter ended September 30, 1996, and the period ended
November 13, 1996, the Company filed the following Report on Form 8-K:
Report filed September 3, 1996 relating to a draft ACC rule for the
introduction of retail electric competition in Arizona.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PINNACLE WEST CAPITAL CORPORATION
(Registrant)
Dated: November 14, 1996 By: /s/ William J. Post
------------------
William J. Post
Executive Vice President
(Principal Financial Officer and
Officer Duly Authorized to sign
this Report)
19
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