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, 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)
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 August 1, 1996: 87,443,399
<PAGE>
- i -
Glossary
--------
ACC -- Arizona Corporation Commission
ACC Staff -- Staff of the Arizona Corporation Commission
AFUDC -- Allowance for funds used during construction
APS -- Arizona Public Service Company
Company -- Pinnacle West Capital Corporation
El Dorado -- El Dorado Investment Company
EPA -- Environmental Protection Agency
ITCs -- Investment tax credits
March 10-Q -- Pinnacle West Capital Corporation Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 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
Pinnacle West -- Pinnacle West Capital Corporation
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
June 30,
1996 1995
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 426,658 $ 380,178
Real estate 26,150 13,053
------------ ------------
Total 452,808 393,231
------------ ------------
Fuel Expenses
Fuel for electric generation 57,289 44,823
Purchased power 22,466 17,814
------------ ------------
Total 79,755 62,637
------------ ------------
Operating Expenses
Utility operations and maintenance 100,296 94,251
Real estate operations 25,811 12,856
Depreciation and amortization 59,342 60,843
Taxes other than income taxes 35,510 35,435
------------ ------------
Total 220,959 203,385
------------ ------------
Operating Income 152,094 127,209
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction 2,003 1,348
Interest on long-term debt (44,675) (52,677)
Other interest (6,201) (4,517)
Allowance for borrowed funds used during construction 2,164 2,355
Preferred stock dividend requirements of APS (4,326) (4,776)
Other-net (980) 1,286
------------ ------------
Total (52,015) (56,981)
------------ ------------
Income Before Income Taxes and Extraordinary Charge 100,079 70,228
Income Tax Expense 38,625 27,979
------------ ------------
Income Before Extraordinary Charge 61,454 42,249
Extraordinary Charge for Early Retirement of Debt,
Net of Income Tax of $1,674 (2,471) -
------------ ------------
Net Income $ 58,983 $ 42,249
============ ============
Average Common Shares Outstanding 87,420,263 87,403,426
Earnings Per Average Common Share Outstanding:
Income Before Extraordinary Charge $ 0.70 $ 0.48
Extraordinary Charge (0.03) -
------------ ------------
Total $ 0.67 $ 0.48
============ ============
Dividends Declared Per Share $ 0.250 $ 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>
Six Months Ended
June 30,
1996 1995
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 771,919 $ 717,146
Real estate 42,144 22,199
------------ ------------
Total 814,063 739,345
------------ ------------
Fuel Expenses
Fuel for electric generation 99,623 91,533
Purchased power 36,404 26,024
------------ ------------
Total 136,027 117,557
------------ ------------
Operating Expenses
Utility operations and maintenance 188,039 185,683
Real estate operations 43,353 20,351
Depreciation and amortization 118,277 121,690
Taxes other than income taxes 69,711 71,156
------------ ------------
Total 419,380 398,880
------------ ------------
Operating Income 258,656 222,908
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction 3,678 2,534
Interest on long-term debt (90,584) (107,597)
Other interest (11,047) (7,753)
Allowance for borrowed funds used during construction 5,401 4,351
Preferred stock dividend requirements of APS (8,803) (9,583)
Other-net 687 5,878
------------ ------------
Total (100,668) (112,170)
------------ ------------
Income Before Income Taxes and Extraordinary Charge 157,988 110,738
Income Tax Expense 61,675 43,866
------------ ------------
Income Before Extraordinary Charge 96,313 66,872
Extraordinary Charge for Early Retirement of Debt,
Net of Income Tax of $4,110 (6,068) -
------------ ------------
Net Income $ 90,245 $ 66,872
============ ============
Average Common Shares Outstanding 87,435,309 87,398,822
Earnings Per Average Common Share Outstanding:
Income Before Extraordinary Charge $ 1.10 $ 0.77
Extraordinary Charge (0.07) -
------------ ------------
Total $ 1.03 $ 0.77
============ ============
Dividends Declared Per Share $ 0.500 $ 0.450
============ ============
</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
June 30,
1996 1995
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 1,669,725 $ 1,600,109
Real estate 74,791 56,592
------------ ------------
Total 1,744,516 1,656,701
------------ ------------
Fuel Expenses
Fuel for electric generation 217,018 210,578
Purchased power 71,250 63,243
------------ ------------
Total 288,268 273,821
------------ ------------
Operating Expenses
Utility operations and maintenance 403,170 391,539
Real estate operations 73,346 55,877
Depreciation and amortization 240,576 242,868
Taxes other than income taxes 140,984 141,717
------------ ------------
Total 858,076 832,001
------------ ------------
Operating Income 598,172 550,879
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction 6,126 4,652
Interest on long-term debt (192,280) (223,841)
Other interest (20,269) (14,974)
Allowance for borrowed funds used during construction 10,115 7,276
Preferred stock dividend requirements of APS (18,354) (20,375)
Other-net (8,687) 2,662
------------ ------------
Total (223,349) (244,600)
------------ ------------
Income Before Income Taxes and Extraordinary Charge 374,823 306,279
------------ ------------
Income Taxes
Income tax expense 145,774 135,879
Non-recurring income tax benefit - (26,770)
------------ ------------
Total 145,774 109,109
------------ ------------
Income Before Extraordinary Charge 229,049 197,170
Extraordinary Charge for Early Retirement of Debt,
Net of Income Tax of $11,944 (17,639) -
------------ ------------
Net Income $ 211,410 $ 197,170
============ ============
Average Common Shares Outstanding 87,437,388 87,401,261
Earnings Per Average Common Share Outstanding:
Income Before Extraordinary Charge $ 2.62 $ 2.26
Extraordinary Charge (0.20) -
------------ ------------
Total $ 2.42 $ 2.26
============ ============
Dividends Declared Per Share $ 0.975 $ 0.875
============ ============
</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>
June 30, December 31,
1996 1995
---------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 18,865 $ 79,539
Customer and other receivables--net 137,551 131,393
Accrued utility revenues 63,932 53,519
Material and supplies 77,242 78,271
Fossil fuel 17,422 21,722
Deferred income taxes 46,316 46,355
Other current assets 17,798 19,671
---------- ----------
Total current assets 379,126 430,470
---------- ----------
Investments and Other Assets
Real estate investments--net 410,729 411,693
Other assets 167,933 151,127
---------- ----------
Total investments and other assets 578,662 562,820
---------- ----------
Utility Plant
Electric plant in service and held for future use 6,643,725 6,544,860
Less accumulated depreciation and
amortization 2,334,170 2,231,614
---------- ----------
Total 4,309,555 4,313,246
Construction work in progress 271,889 281,757
Nuclear fuel, net of amortization 52,404 52,084
---------- ----------
Net utility plant 4,633,848 4,647,087
---------- ----------
Deferred Debits
Regulatory asset for income taxes 544,615 548,464
Palo Verde Unit 3 cost deferral 278,845 283,426
Palo Verde Unit 2 cost deferral 162,842 165,873
Other deferred debits 366,924 358,912
---------- ----------
Total deferred debits 1,353,226 1,356,675
---------- ----------
Total Assets $6,944,862 $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)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 99,189 $ 114,963
Accrued taxes 118,687 95,962
Accrued interest 44,651 48,958
Dividends payable 21,879 -
Short-term borrowings 194,265 177,800
Current maturities of long-term debt 317,685 8,780
Customer deposits 34,709 32,746
Other current liabilities 33,437 25,284
---------- ----------
Total current liabilities 864,502 504,493
---------- ----------
Long-Term Debt Less Current Maturities 2,116,131 2,510,709
---------- ----------
Deferred Credits and Other
Deferred income taxes 1,327,677 1,327,881
Deferred investment tax credit 86,691 97,897
Unamortized gain - sale of utility plant 89,227 91,514
Other 314,562 314,910
---------- ----------
Total deferred credits and other 1,818,157 1,832,202
---------- ----------
Commitments and Contingencies (Notes 6 and 7)
Minority Interests
Non-redeemable preferred stock of APS 173,526 193,561
---------- ----------
Redeemable preferred stock of APS 66,000 75,000
---------- ----------
Common Stock Equity
Common stock, no par value 1,639,492 1,638,684
Retained earnings 267,054 242,403
---------- ----------
Total common stock equity 1,906,546 1,881,087
---------- ----------
Total Liabilities and Equity $6,944,862 $6,997,052
========== ==========
</TABLE>
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>
Six Months Ended
June 30,
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before extraordinary charge $ 96,313 $ 66,872
Items not requiring cash
Depreciation and amortization 134,567 137,165
Deferred income taxes--net 3,684 12,820
Allowance for equity funds used during construction (3,678) (2,534)
Deferred investment tax credit (11,206) (8,167)
Other--net (1,711) 4,069
Changes in current assets and liabilities
Customer and other receivables -- net (5,896) 24,284
Accrued utility revenues (10,413) (9,902)
Materials, supplies and fossil fuel 5,329 7,372
Other current assets 12,617 (5,233)
Accounts payable (11,094) (30,668)
Accrued taxes 22,725 21,596
Accrued interest (4,307) (3,892)
Other current liabilities 14,225 11,391
Decrease (increase) in land held 7,156 (10,592)
Other--net 557 (23,390)
--------- ---------
Net Cash Flow Provided By Operating Activities 248,868 191,191
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (120,810) (144,227)
Allowance for borrowed funds used during construction (5,401) (4,351)
Other--net (12,392) (1,259)
--------- ---------
Net Cash Flow Used For Investing Activities (138,603) (149,837)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 108,993 96,673
Short-term borrowings--net 16,465 47,755
Dividends paid on common stock (43,715) (39,330)
Repayment of long-term debt (218,387) (150,003)
Redemption of preferred stock (30,603) (4)
Extraordinary charge for early retirement of debt (6,068) -
Other--net 2,376 (130)
--------- ---------
Net Cash Flow Used For Financing Activities (170,939) (45,039)
--------- ---------
Net Cash Flow (60,674) (3,685)
Cash and Cash Equivalents at Beginning of Period 79,539 34,719
--------- ---------
Cash and Cash Equivalents at End of Period $ 18,865 $ 31,034
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 95,810 $ 111,620
Income taxes $ 40,000 $ 21,317
</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 June 30, 1996, the results of
operations for the three months, six months and twelve months ended June 30,
1996 and 1995, and the cash flows for the six months ended June 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 six months ended June 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
and an ongoing investigation by the ACC Staff into industry restructuring in an
open competition docket involving many parties, the 1996 regulatory agreement
also includes an element setting out a number of issues which APS and the ACC
Staff agree the ACC should be requested to consider in developing restructuring
policies. See Note 3 of Notes to Consolidated Financial Statements in Part II,
Item 8 of the 1995 10-K for further discussion of the industry restructuring
element of the agreement. As part of the competition docket, and in response to
the ACC Staff's request, on June 28, 1996 APS filed its recommended phased
retail access plan under which APS proposed generation market access to larger
customers beginning in the year 2000 and expanding such access to smaller
commercial and industrial customers, and eventually all customers, in successive
steps thereafter. APS expects that the implementation of its plan would support
effective competition, including resolving issues of exclusive service territory
rights, obligation to serve, reciprocity and the recovery of potentially
stranded costs. Other parties have also submitted their plans as part of this
docket. The ACC Staff has advised that they presently intend to prepare a draft
rule on competition and will solicit comments from all parties on the draft
rule. APS cannot currently predict the outcome of this matter.
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, 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
8
<PAGE>
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 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 the license periods (until 2025 and 2027, respectively), although
APS will continue its normal periodic assessment of these steam generators.
9
<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 June 1996, the parent company prepaid $30 million of its debt,
incurring a prepayment penalty of $2.5 million after income taxes, reducing the
aggregate principal amount to approximately $250 million.
On August 12, Pinnacle West will prepay 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 will be 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 25 cents per share of common
stock totaling approximately $21.9 million, payable September 1, 1996 to
shareholders of record on August 1, 1996.
APS
- - ---
For the six months ended June 30, 1996, APS incurred approximately $114
million in capital expenditures, accounting for approximately 44% 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
10
<PAGE>
approximately $214 million, $164 million, and $114 million for the years 1996,
1997, and 1998, respectively. During the six months ended June 30, 1996, APS
redeemed approximately $140 million of its long-term debt and approximately $30
million of its preferred stock, and incurred $100 million of long-term debt
under a revolving credit agreement. It is APS' intention over the next several
years to use excess cash flow 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, six-month and twelve-month periods ended June
30, 1996 and 1995:
11
<PAGE>
Income (Loss)
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1996 1995 1996 1995 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
APS $ 66,114 $ 48,676 $ 107,243 $ 81,701 $ 245,978 $ 210,076
SunCor 118 187 (1,092) 1,354 1,632 1,329
El Dorado 97 1,260 (39) 403 8,065 (2,721)
Pinnacle West (1) (7,346) (7,874) (15,867) (16,586) (44,265) (11,514)
--------- --------- --------- --------- --------- ---------
NET INCOME $ 58,983 $ 42,249 $ 90,245 $ 66,872 $ 211,410 $ 197,170
========= ========= ========= ========= ========= =========
</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): $3,177 and $4,134 for the three
months ended June 30, 1996 and 1995, respectively; $8,274 and $8,128 for the
six months ended June 30, 1996 and 1995, respectively; and $21,253 and
$49,061 for the twelve months ended June 30, 1996 and 1995, respectively.
12
<PAGE>
APS
- - ---
Operating Results - Three-month period ended June 30, 1996 compared to
three-month period ended June 30, 1995
Earnings increased in the three-month period ended June 30, 1996
primarily due to increased operating revenues resulting from warmer weather and
customer growth. Partially offsetting the increased operating revenues were
increases in fuel expenses and operations and maintenance expenses. Fuel
expenses were higher due to increased retail sales, higher coal prices, and
higher natural gas costs. Operations and maintenance expenses increased
primarily due to the timing of charges for employee incentive plans.
Operating Results - Six-month period ended June 30, 1996 compared to six-month
period ended June 30, 1995
Earnings increased in the six-month period ended June 30, 1996
primarily due to increased operating revenues and lower interest expense.
Operating revenues were higher due to customer growth and warmer weather.
Interest expense decreased due to lower interest rates and lower debt balances.
Partially offsetting these positive factors were an increase in fuel expenses
and a gain on the sale of a small subsidiary in the first quarter of 1995. Fuel
expenses were higher due to increased retail sales, higher coal prices, and
higher natural gas costs.
Operating Results - Twelve-month period ended June 30, 1996 compared to
twelve-month period ended June 30, 1995
Earnings increased in the twelve-month period ended June 30, 1996
primarily due to increased operating revenues and accelerated investment tax
credit amortization. Operating revenues increased due to customer growth, higher
residential usage, and warmer weather. The accelerated investment tax credit
amortization was a result of the 1994 rate settlement (see "Other Income" below)
and is reflected as a decrease in income tax expense.
Partially offsetting these positive factors were increased fuel
expenses, write-downs of an office building and certain inventory, 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.
Non-utility Operations
- - ----------------------
The parent company incurred extraordinary charges for the prepayment of
debt in the three-month, six-month and twelve-month periods. Interest expense
decreased in all periods due primarily to debt reduction. Additionally, the
parent company's
13
<PAGE>
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 decreased in the six-month period due to the
expiration in 1995 of a lease agreement related to the Wigwam Resort. Earnings
increased in the twelve-month period as a result of increased earnings in joint
ventures and management fees.
El Dorado's earnings for the three-month and six-month periods
decreased relative to the prior year periods because of the prior recognition of
a gain from the sale of an investment in 1995. Earnings for the twelve-month
period increased due to sales of investments, and also due to the absence of an
investment writedown taken in the prior period.
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.
REGULATORY MATTERS
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 industry restructuring.
14
<PAGE>
PART II. OTHER INFORMATION
--------------------------
The following information relates primarily to Pinnacle West and its
principal subsidiary, APS.
Item 1. Legal Proceedings
- - ------------------------------
Property Taxes
--------------
As previously reported, on April 23, 1996 the parties reached an
agreement to settle the litigation in which the Arizona Court of Appeals held
that an Arizona state property tax law, effective December 31, 1989, is
unconstitutional and a lawsuit filed by the Palo Verde participants, including
APS, was returned to the Arizona Tax Court for determination of the appropriate
remedy consistent with that decision. See "Property Taxes" in Part II, Item 1 of
the March 10-Q. On July 18, 1996, the Governor signed a new Arizona property tax
law which amends the statute declared unconstitutional and is expected to reduce
the aggregate property tax of APS by approximately $18 million (before income
taxes) per year. Under the formula for potential future rate reduction pursuant
to the 1996 regulatory agreement (see "Regulatory Matters - Regulatory
Agreement" in Note 5 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report), the property tax reduction may reduce future
retail rates. The parties to the litigation anticipate that a settlement will be
reached pursuant to which APS will relinquish its claims for retrospective
relief provided that the prospective relief provided by the new law is not
changed (other than by changes in law affecting taxpayers generally) for a
period of three years.
Item 4. Submission of Matters to a Vote of Security-Holders
- - --------------------------------------------------------------
At the Company's Annual Meeting of Shareholders held on May 22, 1996,
the following persons were elected Class III Directors with a term to expire at
the 1999 annual meeting:
Abstentions
Votes Votes and Broker
For Against Non Votes
--- ------- ---------
Mark DeMichele 77,886,740 721,440 N/A
John Norton 77,913,791 694,389 N/A
Douglas Wall 77,884,722 723,457 N/A
15
<PAGE>
Item 5. Other Information
- - --------------------------
Environmental Matters
---------------------
As previously reported, pursuant to the Clean Air Act Amendments of
1990, the EPA established a "Grand Canyon Visibility Transport Commission" to
complete a study on visibility impairment in the "Golden Circle of National
Parks." See "Environmental Matters - EPA Environmental Regulation" in Part I,
Item 1 of the 1995 10-K. The Commission completed its study and on June 10,
1996 submitted its final recommendations to EPA. Pursuant to the
recommendations, beginning in 2000 and every 5 years thereafter, sulfur
dioxide emissions would be measured and if the emissions exceed the projected
emissions, which under the current regulatory scheme are expected to decline,
EPA would implement a program to limit total sulfur dioxide emissions in the
western United States. If such a program was implemented, industry, including
APS' coal plants, could be subject to further emissions limits. The EPA will
consider these recommendations before promulgating final requirements. APS
cannot currently predict the outcome of this matter.
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
restructuring issues.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
16
<PAGE>
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 Amendment No. 3 to 10.1 to APS' 1-4473 8/9/96
Amended and Restated June 1996
Decommissioning Form 10-Q Report
Trust Agreement
(PVNGS Unit 2) dated
as of Nov. 1, 1994.
(b) Reports on Form 8-K
During the quarter ended June 30, 1996, and the period ended August 9,
1996, the Company filed no reports on Form 8-K.
17
<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: August 9, 1996 By: /s/ Nancy Newquist
------------------
Nancy Newquist
Vice President and Treasurer
(Principal Financial Officer and
Officer Duly Authorized to sign
this Report)
18
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