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, 1997
---------------------------------------
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, 1997: 84,717,595
<PAGE>
i
Glossary
--------
ACC........................Arizona Corporation Commission
ACC Staff .................Staff of the Arizona Corporation Commission
Affected Utilities ........Utilities affected by the ACC's Proposed Rules on
retail electric competition in Arizona
APS .......................Arizona Public Service Company
Cholla.....................Cholla Power Plant
Company ...................Pinnacle West Capital Corporation
El Dorado .................El Dorado Investment Company
EPA........................United States Environmental Protection Agency
FERC ......................Federal Energy Regulatory Commission
Four Corners...............Four Corners Power Plant
ITCs ......................Investment tax credits
1996 10-K .................Pinnacle West Capital Corporation Annual Report on
Form 10-K for the fiscal year ended December 31, 1996
NGS........................Navajo Generating Station
Palo Verde ................Palo Verde Nuclear Generating Station
Rules .....................Rules adopted by the ACC for the introduction of
retail electric competition in Arizona
SFAS No. 71 ...............Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of
Regulation"
SFAS No. 128 ..............Statement of Financial Accounting Standards No. 128,
"Earnings per Share"
SFAS No. 130...............Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income"
<PAGE>
ii
SFAS No. 131 ..............Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and
Related Information"
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
September 30,
1997 1996
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 632,821 $ 566,899
Real estate 30,929 31,892
------------ ------------
Total 663,750 598,791
------------ ------------
Fuel Expenses
Fuel for electric generation 48,379 68,243
Purchased power 110,151 39,793
------------ ------------
Total 158,530 108,036
------------ ------------
Operating Expenses
Utility operations and maintenance 110,102 100,386
Real estate operations 29,487 28,396
Depreciation and amortization 91,594 91,144
Taxes other than income taxes 30,583 25,029
------------ ------------
Total 261,766 244,955
------------ ------------
Operating Income 243,454 245,800
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction -- 1,942
Interest on long-term debt (40,775) (41,366)
Other interest (4,403) (6,824)
Capitalized interest 3,997 2,021
Preferred stock dividend requirements of APS (2,984) (4,153)
Other-net 1,937 (272)
------------ ------------
Total (42,228) (48,652)
------------ ------------
Income Before Income Tax and Extraordinary Charge 201,226 197,148
Income Tax Expense 76,886 75,742
------------ ------------
Income Before Extraordinary Charge 124,340 121,406
Extraordinary Charge for Early Retirement of Debt,
Net of Income Tax of $9,667 -- (14,272)
------------ ------------
Net Income $ 124,340 $ 107,134
============ ============
Average Common Shares Outstanding 84,747,949 87,439,830
Earnings Per Average Common Share Outstanding:
Income before extraordinary charge $ 1.47 $ 1.39
Extraordinary charge -- (0.16)
------------ ------------
Total $ 1.47 $ 1.23
============ ============
Dividends Declared Per Share $ -- $ 0.275
============ ============
</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,
1997 1996
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 1,470,593 $ 1,338,818
Real estate 80,638 74,036
------------ ------------
Total 1,551,231 1,412,854
------------ ------------
Fuel Expenses
Fuel for electric generation 155,127 167,866
Purchased power 188,182 76,197
------------ ------------
Total 343,309 244,063
------------ ------------
Operating Expenses
Utility operations and maintenance 287,280 288,425
Real estate operations 77,550 71,749
Depreciation and amortization 276,005 209,421
Taxes other than income taxes 91,138 94,740
------------ ------------
Total 731,973 664,335
------------ ------------
Operating Income 475,949 504,456
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction -- 5,620
Interest on long-term debt (120,679) (131,950)
Other interest (14,877) (17,871)
Capitalized interest 12,391 7,422
Preferred stock dividend requirements of APS (9,805) (12,956)
Other-net 10,983 415
------------ ------------
Total (121,987) (149,320)
------------ ------------
Income Before Income Tax and Extraordinary Charge 353,962 355,136
Income Tax Expense 137,058 137,417
------------ ------------
Income Before Extraordinary Charge 216,904 217,719
Extraordinary Charge for Early Retirement of Debt,
Net of Income Tax of $13,777 -- (20,340)
------------ ------------
Net Income $ 216,904 $ 197,379
============ ============
Average Common Shares Outstanding 85,764,317 87,436,827
Earnings Per Average Common Share Outstanding:
Income before extraordinary charge $ 2.53 $ 2.49
Extraordinary charge -- (0.23)
------------ ------------
Total $ 2.53 $ 2.26
============ ============
Dividends Declared Per Share $ 0.825 $ 1.025
============ ============
</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,
1997 1996
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 1,850,047 $ 1,687,542
Real estate 106,090 97,009
------------ ------------
Total 1,956,137 1,784,551
------------ ------------
Fuel Expenses
Fuel for electric generation 217,654 216,546
Purchased power 207,115 87,504
------------ ------------
Total 424,769 304,050
------------ ------------
Operating Expenses
Utility operations and maintenance 429,569 405,991
Real estate operations 101,881 90,941
Depreciation and amortization 366,091 270,095
Taxes other than income taxes 118,475 130,515
------------ ------------
Total 1,016,016 897,542
------------ ------------
Operating Income 515,352 582,959
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction (411) 6,957
Interest on long-term debt (160,187) (182,291)
Other interest (20,770) (21,693)
Capitalized interest 14,478 10,006
Preferred stock dividend requirements of APS (13,941) (17,732)
Other-net 3,820 4,134
------------ ------------
Total (177,011) (200,619)
------------ ------------
Income From Continuing Operations Before Income Tax 338,341 382,340
Income Tax Expense 128,097 146,380
------------ ------------
Income From Continuing Operations 210,244 235,960
Loss on Discontinued Operations, Net of Income Tax of $6,461 (9,539) --
Extraordinary Charge for Early Retirement of Debt,
Net of Income Tax of $21,611 -- (31,911)
------------ ------------
Net Income $ 200,705 $ 204,049
============ ============
Average Common Shares Outstanding 86,190,582 87,443,641
Earnings Per Average Common Share Outstanding:
Continuing operations $ 2.44 $ 2.69
Discontinued operations (0.11) --
Extraordinary charge -- (0.36)
------------ ------------
Total $ 2.33 $ 2.33
============ ============
Dividends Declared Per Share $ 0.825 $ 1.275
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
(Thousands of Dollars)
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 47,346 $ 26,686
Customer and other receivables--net 254,064 169,237
Accrued utility revenues 82,067 55,470
Material and supplies 74,583 74,120
Fossil fuel 11,388 13,928
Deferred income taxes 69,723 69,688
Other current assets 43,182 41,140
---------- ----------
Total current assets 582,353 450,269
---------- ----------
Investments and Other Assets
Real estate investments--net 378,563 398,527
Other assets 214,048 173,109
---------- ----------
Total investments and other assets 592,611 571,636
---------- ----------
Utility Plant
Electric plant in service and held for future use 6,930,706 6,803,211
Less accumulated depreciation and
amortization 2,616,756 2,426,143
---------- ----------
Total 4,313,950 4,377,068
Construction work in progress 299,166 226,935
Nuclear fuel, net of amortization 59,268 51,137
---------- ----------
Net utility plant 4,672,384 4,655,140
---------- ----------
Deferred Debits
Regulatory asset for income taxes 471,653 516,722
Rate synchronization cost deferrals 372,674 414,082
Other deferred debits 344,247 381,440
---------- ----------
Total deferred debits 1,188,574 1,312,244
---------- ----------
Total Assets $7,035,922 $6,989,289
========== ==========
</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>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 194,939 $ 184,095
Accrued taxes 183,727 82,413
Accrued interest 27,885 39,652
Short-term borrowings 117,794 16,900
Current maturities of long-term debt 107,774 156,277
Customer deposits 32,594 34,222
Other current liabilities 33,842 37,056
---------- ----------
Total current liabilities 698,555 550,615
---------- ----------
Long-Term Debt Less Current Maturities 2,276,234 2,372,113
---------- ----------
Deferred Credits and Other
Deferred income taxes 1,334,158 1,359,312
Deferred investment tax credit 53,372 74,379
Unamortized gain - sale of utility plant 83,507 86,939
Other 382,024 356,935
---------- ----------
Total deferred credits and other 1,853,061 1,877,565
---------- ----------
Commitments and Contingencies (Notes 5, 6 and 7)
Minority Interests
Non-redeemable preferred stock of APS 142,927 165,673
---------- ----------
Redeemable preferred stock of APS 29,110 53,000
---------- ----------
Common Stock Equity
Common stock, no par value 1,555,907 1,636,354
Retained earnings 480,128 333,969
---------- ----------
Total common stock equity 2,036,035 1,970,323
---------- ----------
Total Liabilities and Equity $7,035,922 $6,989,289
========== ==========
</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>
Nine Months Ended
September 30,
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before extraordinary charge $ 216,904 $ 217,719
Items not requiring cash
Depreciation and amortization 300,698 235,600
Deferred income taxes--net (17,740) 3,195
Allowance for equity funds used during construction -- (5,620)
Deferred investment tax credit (21,007) (22,244)
Other--net (5,017) (459)
Changes in current assets and liabilities
Customer and other receivables--net (86,483) (39,756)
Accrued utility revenues (26,597) (20,489)
Materials, supplies and fossil fuel 2,077 8,934
Other current assets (1,898) (591)
Accounts payable 20,287 9,004
Accrued taxes 101,314 95,861
Accrued interest (11,767) (19,449)
Other current liabilities (4,883) 20,421
Decrease in land held 16,677 16,043
Other--net 56,234 7,401
--------- ---------
Net Cash Flow Provided By Operating Activities 538,799 505,570
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (229,608) (196,641)
Capitalized interest (12,391) (7,422)
Other--net (31,083) (21,649)
--------- ---------
Net Cash Flow Used For Investing Activities (273,082) (225,712)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 112,413 112,765
Short-term borrowings--net 100,894 132,889
Dividends paid on common stock (70,745) (65,576)
Repayment of long-term debt (260,536) (410,582)
Redemption of preferred stock (46,511) (46,083)
Repurchase and retirement of common stock (81,251) --
Extraordinary charge for early retirement of debt -- (20,340)
Other--net 679 1,938
--------- ---------
Net Cash Flow Used For Financing Activities (245,057) (294,989)
--------- ---------
Net Cash Flow 20,660 (15,131)
Cash and Cash Equivalents at Beginning of Period 26,686 79,539
--------- ---------
Cash and Cash Equivalents at End of Period $ 47,346 $ 64,408
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 128,414 $ 155,943
Income taxes $ 106,440 $ 72,224
</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, 1997, the results of
operations for the three months, nine months and twelve months ended September
30, 1997 and 1996, and the cash flows for the nine months ended September 30,
1997 and 1996. 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 1996 10-K.
3. The operations of APS are subject to seasonal fluctuations, with variations
in energy usage by customers occurring 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, 1997.
5. Regulatory Matters
Electric Industry Restructuring
STATE The ACC has been conducting an ongoing investigation into the
restructuring of the Arizona electric industry. In December 1996, the ACC
adopted rules that provide a framework for the introduction of retail electric
competition. The ACC has ordered that numerous issues, including reliability,
stranded cost measurement and recovery, the phase-in process, bundled, unbundled
and metering services, and Independent System Operators and spot market
development, 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. Some of the working group reports have recently been
issued and the balance are scheduled to be issued by year end. These issued
reports recommend that further ACC consideration of the Rules is necessary prior
to implementation of retail electric competition. Some parties that participated
in the working groups also indicated that state legislation and
7
<PAGE>
possibly amendments to the Arizona Constitution may be necessary. The Rules
include the following major provisions:
* The Rules are intended to apply to virtually all of the Arizona electric
utilities regulated by the ACC, 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 include
electric generation but exclude electric transmission and distribution.
* On or before December 31, 1997, each affected utility is required to file
with the ACC proposed tariffs for bundled service, if different from
current tariffs, and unbundled service. Bundled service means electric
service elements (i.e., generation, transmission, distribution, and
ancillary services) provided as a package to consumers within an affected
utility's current service area. Unbundled service means electric service
elements provided and priced separately.
* The Rules indicate that the ACC will allow recovery of unmitigated stranded
costs. Stranded costs are the costs of generating plants, other assets and
contract commitments that were prudently incurred to serve power customers
that could go unrecovered if these customers are allowed to use open access
to move to another supplier. Each affected utility would be required to
file with the ACC estimates of unmitigated stranded costs. 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.
The Arizona legislature has appointed a joint legislative committee to study
electric utility industry restructuring issues and report back to it by the end
of 1997. Arizona legislative counsel recently prepared a memorandum related to
the legal authority of the ACC to deregulate the Arizona electric utility
industry. This memorandum raises a question as to the degree to which the ACC
may deregulate any portion of the electric utility, and allow rates to be
determined by market forces under the Arizona Constitution. The Company
continues to believe that State legislation ultimately will be required before
significant implementation of retail electric competition can lawfully occur in
Arizona. The Company cannot accurately predict the impact, if any, of the
regulatory and legislative activities and of the possible amendments to the
Arizona Constitution (which amendments would require a vote of the people) on
the timing or manner of implementation of retail electric competition in
Arizona.
8
<PAGE>
The Company continues to focus on working with the ACC and the Arizona
Legislature to bring competitive benefits to Arizona but believes that certain
provisions of the Rules are deficient. In February 1997, APS filed lawsuits to
protect its legal rights regarding the Rules.
Until it has been further determined how competition will be implemented in
Arizona, the Company cannot accurately predict the impact of full retail
competition on its financial position or results of operations.
FEDERAL The Energy Policy Act of 1992 and recent rulemakings by FERC have
promoted increased competition in the wholesale electric power markets. The
Company does not expect these rulemakings to have a material impact on its
financial statements.
Several electric utility reform bills have been introduced during recent
congressional sessions, which as currently written, would allow consumers to
choose their electricity supplier by 2000 or 2003. These bills, other bills that
are expected to be introduced, and ongoing discussions at the federal level
suggest a wide range of opinion that will need to be narrowed before any
substantial restructuring of the electric utility industry can occur.
REGULATORY ACCOUNTING The Company prepares its financial statements in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS
No. 71 requires a cost-based, rate-regulated enterprise to reflect the impact of
regulatory decisions in its financial statements. The Company's existing
regulatory orders and current regulatory environment support its accounting
practices related to regulatory assets, which amounted to approximately $1.0
billion at September 30, 1997. In accordance with the 1996 regulatory agreement
(see below), the ACC accelerated the amortization of substantially all of the
Company's regulatory assets over an eight-year period beginning July 1, 1996. If
rate recovery of these assets is no longer probable, whether due to competition
or regulatory action, the Company would no longer be able to apply the
provisions of SFAS No. 71 to all or some part of its operations, which could
have a material impact on the Company's financial statements.
1996 Regulatory Agreement
In April 1996, the ACC approved a regulatory agreement between APS and the ACC
Staff. The major provisions of this agreement are:
* An annual retail price reduction of approximately $48.5 million ($29
million after income taxes), or 3.4% on average for all customers except
certain contract customers, effective July 1, 1996.
9
<PAGE>
* 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).
* A formula for sharing future cost savings between customers and
shareholders (price reduction formula) referencing a return on equity (as
defined) of 11.25%.
* A moratorium on filing for permanent rate changes prior to July 2, 1999,
except under the price reduction formula and under certain other limited
circumstances.
* Infusion of $200 million of common equity into APS by Pinnacle West, in
annual payments of $50 million, starting in 1996.
Pursuant to the price reduction formula, in May 1997, the ACC approved a retail
price reduction of approximately $17.6 million annually ($11 million after
income taxes), or 1.2%, effective July 1, 1997.
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, 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 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 and these analyses indicate that it will be
economically desirable for APS to replace the Unit 2 steam generators between
2003 and 2008. APS estimates that its share of the replacement costs (in 1997
dollars and including installation and replacement power costs) will be
approximately $50 million, most of which will be incurred after the year 2000.
10
<PAGE>
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.
8. The Financial Accounting Standards Board recently issued three new standards;
SFAS 128 on "Earnings per Share"; SFAS 130 on "Reporting Comprehensive Income";
and SFAS 131 on "Disclosures about Segments of an Enterprise and Related
Information".
The "Earnings per Share" standard is effective for both interim and annual
periods ending after December 15, 1997. The standard will not have a material
effect on the Company's earnings per share.
The "Reporting Comprehensive Income" standard is effective for fiscal years
beginning after December 15, 1997. The standard changes the reporting of certain
items currently reported in the common stock equity section of the balance
sheet. The Company is currently evaluating what impact this standard will have
on its financial statements.
The "Disclosures about Segments of an Enterprise and Related Information"
standard is effective for fiscal years beginning after December 15, 1997. The
standard requires that public companies report certain information about
operating segments in their financial statements. It also establishes related
disclosures about products and services, geographic areas, and major customers.
The Company is currently evaluating what impact this standard will have on its
disclosures.
11
<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
- --------------
For the nine months ended September 30, 1997, the primary source of
cash has been dividends from APS. SunCor and El Dorado both have provided cash
to the parent during 1997.
During the quarter ended September 30, 1997, the parent company repaid
$40 million on its existing line of credit. The parent company's total
outstanding debt as of September 30, 1997, was $240 million.
In March, the Board approved a program for the repurchase of up to $80
million of the Company's common stock. As of July 2, 1997 the Company completed
the program, spending approximately $80 million for the repurchase of 2.7
million shares of stock.
The Board declared a quarterly dividend of 30.0 cents per share of
common stock, payable December 1, 1997, to shareholders of record on November 3,
1997, totaling approximately $25.4 million.
APS
- ---
For the nine months ended September 30, 1997, APS incurred
approximately $221 million in capital expenditures, which is approximately 75%
of the most recently estimated 1997 capital expenditures. APS estimates total
capital expenditures for the years 1997, 1998, and 1999 to be approximately $296
million, $290 million, and $265 million, respectively. These amounts include
about $30 million each year for nuclear fuel expenditures.
12
<PAGE>
Required and optional redemptions of preferred stock and repayment of
long-term debt, including premiums thereon, and payments for a capitalized lease
obligation are expected to total approximately $272 million, $114 million, and
$114 million for the years 1997, 1998, and 1999, respectively. During the nine
months ended September 30, 1997, APS repaid approximately $223 million of its
long-term debt and redeemed approximately $47 million of its preferred stock
with funds from internal cash from operations and long-term and short-term debt.
As a result of the 1996 regulatory agreement (see Note 5 of Notes to Condensed
Consolidated Financial Statements), Pinnacle West invested $50 million in APS in
1996 and will invest similar amounts annually in 1997 through 1999.
During the nine months ended September 30, 1997, APS incurred $60
million of long-term debt under credit agreements and issued $50 million of its
senior notes. Simultaneously with the issuance of the senior notes, APS issued
$50 million of its first mortgage bonds ("senior note mortgage bonds") to the
senior note trustee as collateral for the senior notes. The senior notes
mortgage bonds have the same interest rate, interest payment dates, maturity,
and redemption provisions as the senior notes. APS' payment of principal,
premium, and/or interest on the senior notes satisfy APS' corresponding payment
obligation on the senior note mortgage bonds. As long as the senior note
mortgage bonds secure the senior notes, the senior notes will effectively rank
pari passu with the first mortgage bonds. On the date that APS has repaid all of
its first mortgage bonds, other than those that secure the senior notes, the
senior note mortgage bonds will no longer secure the senior notes and will cease
to be outstanding.
Although provisions in APS' bond indenture, articles of incorporation,
and financing orders from the ACC establish maximum amounts 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, 1997 and 1996:
13
<PAGE>
Income (Loss)
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, September 30, September 30,
1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
APS $ 126,715 $ 124,331 $ 218,032 $ 231,574 $ 212,837 $ 246,739
SunCor 450 2,278 2,706 1,186 5,674 5,465
El Dorado 63 (231) 7,019 (270) 7,660 7,933
Pinnacle West (1) (2,888) (19,244) (10,853) (35,111) (25,466) (56,088)
--------- --------- --------- --------- --------- ---------
NET INCOME $ 124,340 $ 107,134 $ 216,904 $ 197,379 $ 200,705 $ 204,049
========= ========= ========= ========= ========= =========
</TABLE>
(1) Includes Pinnacle West's interest expense, extraordinary charge for early
retirement of debt, discontinued operations and operating expenses net of
income tax benefits. Income tax benefits are as follows (in thousands):
$1,264 and $9,997 for the three months ended September 30, 1997 and 1996,
respectively; and $2,472 and $18,271 for the nine months ended September
30, 1997 and 1996, respectively; and $8,945 and $27,409 for the twelve
months ended September 30, 1997 and 1996, respectively.
14
<PAGE>
APS
- ---
Operating Results - Three-month period ended September 30, 1997 compared to
three-month period ended September 30, 1996
Earnings increased slightly in the three-month comparison as the
impacts of two settlements related to coal and gas used for electric generation
and strong customer growth offset the effects of higher operating costs, milder
weather, and a rate reduction which became effective July 1, 1997 (see Note 5 of
Notes to Condensed Consolidated Financial Statements).
The fuel-related settlements contributed to earnings approximately $21
million before income taxes and were reflected on the income statement as
reductions in fuel expense and as other income. Approximately $16 million of
these settlements related to prior years.
Operating revenues increased $66 million primarily due to a $67 million
increase in sales for resale and $18 million from retail customer growth and
higher usage, partially offset by an $11 million decrease attributable to
weather effects and the 1997 retail price reduction impact of $6 million. Sales
for resale are sales of electricity at wholesale to other electric utilities,
power marketers, or public authorities for resale to their customers. The
increase in sales for resale was a result of increased activity in competitive
bulk power markets and was accompanied by significant increases in related
purchased power. These bulk power activities did not result in a significant
variance in earnings due to market pressures on prices.
Operation and maintenance expenses increased $10 million primarily due
to the timing of charges for employee incentive plans, nuclear refueling
outages, and other expenses, partially offset by the cost savings from a 1996
voluntary severance program. Other taxes increased $5 million primarily due to
an adjustment in the third quarter of 1996 to reflect the impacts of a tax law
change on the first half of 1996.
Operating Results - Nine-month period ended September 30, 1997 compared to
nine-month period ended September 30, 1996
Earnings decreased in the nine-month comparison due to the effects of
the 1996 regulatory agreement (see Note 5 of Notes to Condensed Consolidated
Financial Statements). These effects were partially offset by customer growth,
two settlements related to coal and gas used for electric generation, and lower
financing costs.
In the nine-month comparison, the regulatory agreement, which became
effective July 1, 1996, resulted in $58 million (before income taxes) of
accelerated regulatory asset amortization and retail price reductions which
reduced pretax revenues by $30 million.
15
<PAGE>
Operating revenues increased $132 million primarily due to a $113
million increase in sales for resale and $53 million of retail customer growth
and higher usage, partially offset by the $30 million impact of the retail price
reduction. Sales for resale are sales of electricity at wholesale to other
electric utilities, power marketers, or public authorities for resale to their
customers. The increase in sales for resale was a result of increased activity
in competitive bulk power markets and was accompanied by significant increases
in related purchased power. These bulk power activities did not result in a
significant variance in earnings due to market pressures on prices. The
fuel-related settlements contributed to earnings approximately $21 million
before income taxes and were reflected on the income statement as reductions in
fuel expense and as other income. Approximately $16 million of these settlements
related to prior years. Financing costs decreased $10 million due to lower
amounts of debt and preferred stock outstanding and lower average interest
rates.
Operating Results - Twelve-month period ended September 30, 1997 compared to
twelve-month period ended September 30, 1996
Earnings decreased in the twelve-month comparison ended September 30,
1997 due to the effects of the 1996 regulatory agreement (see Note 5 of Notes to
Condensed Consolidated Financial Statements), a $32 million pretax charge in the
fourth quarter of 1996 for a voluntary severance program, and an increase in
fuel expenses. These effects were partially offset by strong customer growth,
property tax and financing cost savings, two settlements related to coal and gas
used for electric generation, and $6 million related to the recognition of
income tax benefits associated with capital loss carryforwards. The twelve-month
comparison was also positively impacted by $8 million of pretax asset
write-downs in the twelve months ended September 30, 1996.
In the twelve-month comparison, the regulatory agreement, which became
effective July 1, 1996, resulted in $88 million of accelerated regulatory asset
amortization and retail price reductions which reduced revenues by $42 million.
Fuel expenses increased $121 million primarily due to increased retail and
wholesale sales volumes, partially offset by the effects of the fuel-related
settlements. These settlements contributed to earnings approximately $21 million
before income taxes and were reflected on the income statement as reductions in
fuel expense and as other income. Approximately $16 million of these settlements
related to prior years.
Operating revenues increased $163 million primarily due to a $125
million increase in sales for resale and $77 million of customer growth and
higher usage, partially offset by the $42 million impact of the retail price
reduction. Sales for resale are sales of electricity at wholesale to other
electric utilities, power marketers, or public authorities for resale to their
customers. The increase in sales for resale was accompanied by significant
increases in related purchased power and was a result of increased activity in
competitive bulk power markets. These bulk power activities did
16
<PAGE>
not result in a significant variance in earnings due to market pressures on
prices. Other taxes decreased $13 million primarily due to a 1996 change in
property tax law and adjustments to property tax estimates to reflect the actual
amounts billed. Financing costs decreased $13 million due to lower amounts of
debt and preferred stock outstanding and lower average interest rates.
Non-utility Operations
- ----------------------
The parent company's losses decreased in all periods due to lower
interest expense resulting from debt reduction and refinancing which yielded
lower average interest rates. Additionally, all periods ended September 1996
included extraordinary charges related to the early retirement of debt. The
twelve-month period ended September 1997 included an extraordinary charge
related to a loss from discontinued operations on a legal matter related to
MeraBank, A Federal Savings Bank (a former subsidiary).
SunCor's earnings decreased in the three-month period due to a joint
venture sale in the third quarter of 1996. Earnings increased in the nine-month
and twelve-month period due to an increase in net home sales and the sale of a
joint venture project in the first half of 1997.
El Dorado's increase in earnings in the three-month and nine-month
periods was the result of investment sales. Earnings in the twelve-month period
decreased due to the sale of an investment in the fourth quarter of 1995 offset
by current year gains on sales.
Other Income
- ------------
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.
CURRENT ISSUES
The Company's ability to maintain and improve its current level of
earnings will depend on several factors. As the electric industry becomes more
competitive, the Company's ability to reduce costs and increase productivity and
resource utilization will be important factors in maintaining a price structure
that is both attractive to customers and profitable to the Company. Other
important factors that could affect the Company's future earnings levels and any
forward-looking statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of
17
<PAGE>
Operations" include regulatory developments; competitive developments; regional
economic conditions; the cost of debt and equity capital; regulatory, tax and
environmental legislation; weather variations affecting customer usage; and
technological developments in the electricity industry.
Competition
-----------
See Note 5 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for discussions of competitive developments and
regulatory accounting.
Rate Matters
------------
See Note 5 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for a discussion of a price reduction, which
became effective on July 1, 1997.
18
<PAGE>
PART II. OTHER INFORMATION
--------------------------
The following information relates primarily to Pinnacle West and its
principal subsidiary, APS.
ITEM 5. Other Information
- --------------------------
Environmental Matters
- ---------------------
Plant Sites Leased from Navajo Nation
-------------------------------------
In September 1997, a settlement agreement was finalized between APS,
the coal supplier to Four Corners and the Navajo Nation, which settled certain
issues in the Four Corners lease regarding the obligation of the fuel supplier
to pay taxes prior to the expiration of tax waivers in 2001. See "Properties -
Plant Sites Leased from the Navajo Nation" in Part I, Item 2 of the 1996 10-K.
Pursuant to the agreement, APS recognized approximately $14 million of pretax
earnings related to a refund of possessory interest taxes paid by the fuel
supplier. The parties also agreed to renegotiate their business relationship
before 2001 in an effort to permit the electricity generated at Four Corners to
be priced competitively. The Company 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.
Construction and Financing Programs
-----------------------------------
See "Liquidity and Capital Resources" in Part I, Item 2 of this report
for a discussion of APS' construction and financing programs.
19
<PAGE>
Competition and Electric Industry Restructuring
-----------------------------------------------
See Note 5 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for a discussion of competition and the Rules
regarding the introduction of retail electric competition in Arizona. On
February 28, 1997, a lawsuit was filed by APS to protect its legal rights
regarding the Rules and in its complaint APS asked the Court for (i) a judgment
vacating the retail electric competition rules, (ii) a declaratory judgment that
the Rules are unlawful because, among other things, they were entered into
without proper legal authorization, and (iii) a permanent injunction barring the
ACC from enforcing or implementing the Rules and from promulgating any other
regulations without lawful authority.
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 10.1 to APS' 1-4473 11/12/97
dated March 1996
April 24, 1996 Form 10-Q Rpt.
(b) Reports on Form 8-K
During the quarter ended September 30, 1997, and the period October 1,
through November 13, 1997, the Company filed no reports on Form 8-K.
20
<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 13, 1997 By: /s/ George A. Schreiber, Jr.
----------------------------
George A. Schreiber, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Officer Duly Authorized to sign
this Report)
21
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,672,384
<OTHER-PROPERTY-AND-INVEST> 592,611
<TOTAL-CURRENT-ASSETS> 582,353
<TOTAL-DEFERRED-CHARGES> 1,188,574
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,035,922
<COMMON> 1,555,907
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 480,128
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,036,035
29,110
142,927
<LONG-TERM-DEBT-NET> 2,276,234
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 117,794
<LONG-TERM-DEBT-CURRENT-PORT> 107,774
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,326,048
<TOT-CAPITALIZATION-AND-LIAB> 7,035,922
<GROSS-OPERATING-REVENUE> 1,551,231
<INCOME-TAX-EXPENSE> 137,058
<OTHER-OPERATING-EXPENSES> 731,973
<TOTAL-OPERATING-EXPENSES> 1,075,282
<OPERATING-INCOME-LOSS> 475,949
<OTHER-INCOME-NET> (121,987)
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 123,165
<NET-INCOME> 216,904
0
<EARNINGS-AVAILABLE-FOR-COMM> 216,904
<COMMON-STOCK-DIVIDENDS> 70,745
<TOTAL-INTEREST-ON-BONDS> 95,031
<CASH-FLOW-OPERATIONS> 538,799
<EPS-PRIMARY> 2.53
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</TABLE>
