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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
|X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year
ended December 31, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
400 East Van Buren Street, Suite 700
Phoenix, Arizona 85004 (602) 379-2500
(Address of principal executive (Registrant's telephone number,
offices, including area code)
including zip code)
---------------
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
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Name of each exchange on
Title of each class which registered
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Common Stock,............................................................. New York Stock Exchange
No Par Value Pacific Stock Exchange
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Aggregate Market Value
of Shares Held by
Title of Each Class Shares Outstanding as Non-affiliates as of
of Voting Stock of March 23, 1998 March 23, 1998
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Common Stock, No Par Value.............................. 84,796,549 $3,723,041,377(a)
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(a) Computed by reference to the closing price on the composite tape on March
23, 1998, as reported by The Wall Street Journal.
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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 pasts 90
days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X
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Documents Incorporated By Reference
Portions of the registrant's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held on May
20, 1998 are incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
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Page
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GLOSSARY............................................................................................. 1
PART I
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 14
Item 3. Legal Proceedings...................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................................... 20
Supplemental Item.
Executive Officers of the Registrant................................................... 20
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters............... 21
Item 6. Selected Consolidated Financial Data................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation .............................................................. 24
Item 8. Financial Statements and Supplementary Data............................................ 28
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................... 49
PART III
Item 10 Directors and Executive Officers of the Registrant .................................... 49
Item 11 Executive Compensation ................................................................ 49
Item 12 Security Ownership of Certain Beneficial Owners and Management ........................ 49
Item 13 Certain Relationships and Related Transactions ........................................ 49
PART IV
Item 14 Exhibits, Financial Statements, Financial Statement Schedules,
and Reports on Form 8-K................................................................ 50
SIGNATURES........................................................................................... 73
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GLOSSARY
ACC --- Arizona Corporation Commission
ACC Staff --- Staff of the Arizona Corporation Commission
AFUDC --- Allowance for Funds Used During Construction
Amendments --- Clean Air Act Amendments of 1990
ANPP --- Arizona Nuclear Power Project, also known as Palo Verde
APS --- Arizona Public Service Company
CC&N --- Certificate of convenience and necessity
Cholla --- Cholla Power Plant
Cholla 4 --- Unit 4 of the Cholla Power Plant
Company --- Pinnacle West Capital Corporation
CUC --- Citizens Utilities Company
DOE --- United States Department of Energy
EITF --- Emerging Issues Task Force
EITF 97-4 --- Emerging Issues Task Force Issue No. 97-4, "Deregulation of the
Pricing of Electricity --- Issues Related to the Applications of FASB Statements
No. 71, Accounting for the Effects of Certain Types of Regulation, and No. 101,
Regulated Enterprises --- Accounting for the Discontinuation of Application of
FASB Statement No. 71"
El Dorado --- El Dorado Investment Company
Energy Act --- National Energy Policy Act of 1992
EPA --- United States Environmental Protection Agency
FASB --- Financial Accounting Standards Board
FERC --- Federal Energy Regulatory Commission
Four Corners --- Four Corners Power Plant
GAAP --- Generally accepted accounting principles
ITC --- Investment tax credit
kW --- Kilowatt, one thousand watts
kWh --- Kilowatt-hour, one thousand watts per hour
Mortgage --- Mortgage and Deed of Trust, dated as of July 1, 1946, as
supplemented and amended
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MWh --- Megawatt hours, one million watts per hour
1935 Act --- Public Utility Holding Company Act of 1935
NGS --- Navajo Generating Station
NRC --- Nuclear Regulatory Commission
PacifiCorp --- An Oregon-based utility company
Palo Verde --- Palo Verde Nuclear Generating Station
SEC --- Securities and Exchange Commission
SFAS No. 34 --- Statement of Financial Accounting Standards No. 34,
"Capitalization of Interest Cost"
SFAS No. 71 --- Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation"
SFAS No. 123 --- Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"
SFAS No. 130 --- Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income"
SFAS No. 131 --- Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
SFAS No. 132 --- Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
SRP --- Salt River Project Agricultural Improvement and Power District
SunCor --- SunCor Development Company
USEC --- United States Enrichment Corporation
Waste Act --- Nuclear Waste Policy Act of 1982, as amended
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PART I
ITEM 1. BUSINESS
The Company
General
Pinnacle West Capital Corporation was incorporated in 1985 under the
laws of the State of Arizona and is engaged, through its subsidiaries, in the
generation and distribution of electricity; in real estate development; and in
venture capital investment. The principal executive offices of the Company are
located at 400 East Van Buren Street, Suite 700, Phoenix, Arizona 85004
(telephone 602-379-2500).
At December 31, 1997, the Company and its subsidiaries employed
approximately 7,189 persons. Of these employees, approximately 5,981 were
employees of the Company's major subsidiary, APS, and employees assigned to
joint projects of APS where APS serves as a project manager, and approximately
1,208 were employees of the Company and its other subsidiaries.
Other subsidiaries of the Company, in addition to APS, include SunCor
and El Dorado. See "Business of SunCor Development Company" and "Business of El
Dorado Investment Company" in this Item for further information regarding SunCor
and El Dorado.
This document contains forward-looking statements that involve risks
and uncertainties. Words such as "estimates," "expects," "anticipates," "plans,"
"believes," "projects," and similar expressions identify forward-looking
statements. These risks and uncertainties include, but are not limited to, the
ongoing restructuring of the electric industry; the outcome of the regulatory
proceedings relating to the restructuring; regulatory, tax and environmental
legislation; the ability of APS to successfully compete outside its traditional
regulated markets; regional economic conditions, which could affect customer
growth; the cost of debt and equity capital; weather variations affecting
customer usage; technological developments in the electric industry; and the
strength of the real estate market. See "Business of Arizona Public Service
Company -- Competition" for a discussion of some of these factors.
Arizona Corporation Commission Affiliated Interest Rules. On March 14,
1990, the ACC issued an order adopting certain rules purportedly applicable only
to a certain class of public utilities regulated by the ACC, including APS. The
rules define the terms "public utility holding company" and "affiliate" with
respect to public service corporations regulated by the ACC in such a manner as
to include the Company and all of the Company's non-public service corporation
subsidiaries. By their terms, the rules, among other things, require public
utilities, such as APS, to receive ACC approval prior to (1) obtaining an
interest in, or guaranteeing or assuming the liabilities of, any affiliate not
regulated by the ACC; (2) lending to any such affiliate (except for short-term
loans in an amount less than $100,000); or (3) using utility funds to form a
subsidiary or divest itself of any established subsidiary. The rules also
prevent a utility from transacting business with an affiliate unless the
affiliate agrees to provide the ACC "access to the books and records of the
affiliate to the degree required to fully audit, examine or otherwise
investigate transactions between the public utility and the affiliate." In
addition, the rules provide that an "affiliate or holding company may not divest
itself of, or otherwise relinquish control of, a public utility without thirty
(30) days prior written notification to the [ACC]" and requires all public
utilities subject to them and all public utility holding companies to annually
"provide the [ACC] with a description of diversification plans for the current
calendar year that have been approved by the Boards of Directors." The rules
have not had, nor does the Company expect the rules to have, a material adverse
impact on the business or operations of the Company.
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BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
Following is a discussion of the business of APS, the Company's major
subsidiary.
General
APS was incorporated in 1920 under the laws of Arizona and is engaged
principally in serving electricity in the State of Arizona. The principal
executive offices of APS are located at 400 North Fifth Street, Phoenix, Arizona
85004 (telephone 602-250-1000). The Company owns all of the outstanding shares
of APS' common stock.
APS is Arizona's largest electric utility, with 767,000 customers, and
provides wholesale or retail electric service to the entire state of Arizona
with the exception of Tucson and about one-half of the Phoenix area. During
1997, no single purchaser or user of energy accounted for more than 2% of total
electric revenues. At December 31, 1997, APS employed 5,981 people, which
includes employees assigned to joint projects where APS is project manager.
Competition
Retail
General. Under current law, APS is not in direct competition with any other
regulated electric utility for electric service in APS' retail service
territory. Nevertheless, APS is subject to varying degrees of competition in
certain territories adjacent to or within areas that it serves that are also
currently served by other utilities in its region (such as Tucson Electric Power
Company, Southwest Gas Corporation, and Citizens Utility Company) as well as
cooperatives, municipalities, electrical districts and similar types of
governmental organizations (principally SRP).
APS faces competitive challenges from low-cost hydroelectric power and
natural gas fuel, as well as the access of some utilities to preferential
low-priced federal power and other subsidies. In addition, some customers,
particularly industrial and large commercial, may own and operate facilities to
generate their own electric energy requirements. Such facilities may be operated
by the customers themselves or by other entities engaged for such purpose. The
legislatures and/or the regulatory commissions in most states have considered or
are considering "retail wheeling." This requirement to transmit directly to
retail customers could have the result of allowing retail customers to choose to
purchase electric capacity and energy from the electric utility in whose service
area they are located or from other electric utilities or independent power
producers or power marketers.
ACC Rules Regarding Arizona Electric Industry Restructuring. The ACC
Staff 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 in Arizona in
phases from 1999 to 2003. The ACC ordered in the rules that numerous issues
require additional consideration prior to the implementation of retail electric
competition in Arizona. During 1997, the ACC held workshops to gather input from
various constituencies with respect to those issues.
The rules indicate that the ACC will allow recovery of unmitigated
stranded costs, but do not set forth the mechanisms for determining and
recovering such costs. In February 1998, the ACC completed a formal, generic
hearing on stranded cost determination and recovery. Based on various
assumptions, estimates and methodologies, APS currently estimates that its
stranded costs to be recovered (excluding regulatory assets which have already
been addressed by the ACC) will be less than $500 million. The Company is
seeking full recovery of stranded costs during a transition period proposed to
go through 2006. Decisions by the ACC have not yet been made with respect to
this issue.
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An Arizona joint legislative committee studied electric utility industry
restructuring issues in 1996 and 1997. In conjunction with that study, Arizona
legislative counsel prepared memoranda in late 1997 related to the legal
authority of the ACC to deregulate the Arizona electric utility industry. The
memoranda raise a question as to the degree to which the ACC may, under the
Arizona Constitution, deregulate any portion of the electric utility industry
and allow rates to be determined by market forces. In February 1998, a bill was
introduced in the Arizona legislature to facilitate implementation of retail
electric competition in the state. The bill has progressed through several
stages to date. The bill includes, among other things, a proposal that the ACC
adopt provisions for public service corporations substantially consistent with
some of the bill's provisions for certain government-operated electric
utilities. APS continues to believe that legislation and perhaps amendments to
the Arizona Constitution will ultimately be required before significant
implementation of retail electric competition can lawfully occur in Arizona.
See Note 3 of Notes to Financial Statements for additional information
regarding the rules and other regulatory and legal issues relating to the
electric industry restructuring.
Wholesale
General. APS competes with other utilities, power marketers, and
independent power producers in the sale of electric capacity and energy in the
wholesale market. APS expects that competition to sell capacity will remain
vigorous, and that wholesale prices will remain depressed for at least the next
several years due to increased competition and surplus capacity in the western
United States. APS' rates for wholesale power sales and transmission services
are subject to regulation by the FERC. During 1997, approximately 13% of APS'
electric operating revenues resulted from such sales and charges.
The National Energy Policy Act of 1992 (the "Energy Act") has promoted
increased competition in the wholesale electric power markets. The Energy Act
reformed provisions of the Public Utility Holding Company Act of 1935 (the "1935
Act") and the Federal Power Act to remove certain barriers to competition for
the supply of electricity. For example, the Energy Act permits the FERC to order
transmission access for third parties to transmission facilities owned by
another entity so that independent suppliers and other third parties can sell at
wholesale to customers wherever located. The Energy Act does not, however,
permit the FERC to issue an order requiring transmission access to retail
customers.
Effective July 9, 1996, a FERC decision requires all electric utilities
subject to the FERC's jurisdiction to file transmission tariffs which provide
competitors with access to transmission facilities comparable to the
transmission owners' access for wholesale transactions, establishes information
requirements, and provides for recovery of certain wholesale stranded costs.
Retail stranded costs resulting from a state-authorized retail direct-access
program are the responsibility of the states, unless a state lacks authority to
impose rates to recover such costs, in which case FERC will consider doing so.
APS has filed its revised open access tariff in accordance with this decision.
APS does not believe that this decision will have a material adverse impact on
its results of operations or financial position.
Federal Regulation
Several electric utility reform bills have been introduced during recent
Congressional sessions, which as currently written, would allow consumers to
choose their electric 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 Assets
APS' major regulatory assets are deferred income taxes and rate
synchronization cost deferrals. These items, combined with miscellaneous
regulatory assets and liabilities, amounted to approximately $1.0 billion at
December 31, 1997. In accordance with a 1996 regulatory agreement, the ACC
accelerated the amortization of substantially all of
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APS' regulatory assets to an eight-year period beginning July 1, 1996. APS'
existing regulatory orders and current regulatory environment support its
accounting practices related to regulatory assets. If rate recovery of these
assets is no longer probable, whether due to competition or regulatory action,
APS 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 APS' financial
statements. See Notes 1, 3 and 4 of Notes to Financial Statements in Item 8 for
additional information.
Competitive Strategies
APS is pursuing strategies to maintain and enhance its competitive
position. These strategies include (i) cost management, with an emphasis on the
reduction of variable costs (fuel, operations, and maintenance expenses) and on
increased productivity through technological efficiencies; (ii) a focus on APS'
core business through customer service, distribution system reliability,
business segmentation and the anticipation of market opportunities; (iii) an
emphasis on good regulatory relationships; (iv) asset maximization (e.g., higher
capacity factors and lower forced outage rates); (v) strengthening APS' capital
structure and financial condition; (vi) leveraging core competencies into
related areas, such as energy management products and services; and (vii)
establishing a trading floor and implementing a risk management program to
provide for more stability of prices and the ability to retain or grow
incremental margin through more competitive pricing and risk management.
Underpinning APS' competitive strategies are the strong growth characteristics
of APS' service territory. As competition in the electric utility industry
continues to evolve, APS will continue to evaluate strategies and alternatives
that will position APS to compete effectively in a more competitive,
restructured industry.
Generating Fuel and Purchased Power
1997 Energy Mix
APS' sources of energy during 1997 were: coal - 36.5%; nuclear - 28.2%;
other - 3.1%; and purchased power - 32.2%.
Coal Supply
APS believes that Cholla has sufficient reserves of low sulfur coal
committed to the plant for the next two years, the term of the existing coal
contract. In 1997, the current supplier experienced production and delivery
problems that required Cholla to purchase coal from the spot market. The current
supplier is expected to continue to provide substantially all of Cholla's low
sulfur coal requirements. Contract renegotiation with the current supplier is in
progress. The current supplier has sufficient reserves of low sulfur coal
available to allow the continued operation of Cholla for its useful life. APS
also believes that Four Corners and NGS have sufficient reserves of low sulfur
coal available for use by those plants to continue operating them for their
useful lives.
The current sulfur content of coal being used at Four Corners, NGS and
Cholla is approximately 0.78%, 0.55% and 0.44%, respectively. In 1997, average
prices paid for coal supplied from the reserves dedicated under the existing
contracts were comparable to 1996. Escalation components of existing long-term
coal contracts impact future coal prices. In addition, major price adjustments
can occur from time to time as a result of contract renegotiation.
NGS and Four Corners are located on the Navajo Reservation and held under
easements granted by the federal government as well as leases from the Navajo
Nation. See "Properties- Plant Sites Leased from the Navajo Nation" in Item 2.
APS purchases all of the coal which fuels Four Corners from a coal supplier with
a long-term lease of coal reserves owned by the Navajo Nation and for NGS from a
coal supplier with a long-term lease with the Navajo Nation and the Hopi Tribe.
Coal is supplied to Cholla from a coal supplier who mines all of the coal under
a long-term lease of coal reserves owned by the Navajo Nation, the federal
government, and private landholders. See Note 12 of Notes to Financial
Statements in Item 8 for information regarding APS' obligation for coal mine
reclamation.
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Natural Gas Supply
APS is a party to contracts with a number of natural gas operators and
marketers which allow APS to purchase natural gas in the method it determines to
be most economic. APS is currently purchasing the majority of its natural gas
requirements from twelve companies pursuant to contracts. APS' natural gas
supply is transported pursuant to a firm transportation service contract between
APS and El Paso Natural Gas Company. APS continues to analyze the market to
determine the source and method of meeting its natural gas requirements.
Nuclear Fuel Supply
The fuel cycle for Palo Verde is comprised of the following stages: (1) the
mining and milling of uranium ore to produce uranium concentrates, (2) the
conversion of uranium concentrates to uranium hexafluoride, (3) the enrichment
of uranium hexafluoride, (4) the fabrication of fuel assemblies, (5) the
utilization of fuel assemblies in reactors and (6) the storage of spent fuel and
the disposal thereof. The Palo Verde participants have made arrangements through
contract flexibilities to obtain quantities of uranium concentrates anticipated
to be sufficient to meet operational requirements through 2000. Existing
contracts and options could be utilized to meet approximately 80% of
requirements in 2001 and 2002 and 50% of requirements from 2003 through 2007.
Spot purchases in the uranium market will be made, as appropriate, in lieu of
any uranium that might be obtained through contract flexibilities and options.
The Palo Verde participants have contracted for all conversion services required
through 1998 and for up to 60% through 2002. The Palo Verde participants,
including APS, have an enrichment services contract with USEC which obligates
USEC to furnish enrichment services required for the operation of the three Palo
Verde units over a term expiring in September 2002, with options to continue
through September 2007. In addition, existing contracts will provide fuel
assembly fabrication services until at least 2003 for each Palo Verde unit, and
through contract options, approximately fifteen additional years are available.
Spent Nuclear Fuel and Waste Disposal. Pursuant to the Nuclear Waste Policy
Act of 1982, as amended in 1987 (the "Waste Act"), DOE is obligated to accept
and dispose of all spent nuclear fuel and other high-level radioactive wastes
generated by all domestic power reactors. The NRC, pursuant to the Waste Act,
requires operators of nuclear power reactors to enter into spent fuel disposal
contracts with DOE, and APS, on its own behalf and on behalf of the other Palo
Verde participants, has done so. Under the Waste Act, DOE was to develop the
facilities necessary for the storage and disposal of spent nuclear fuel and to
have the first such facility in operation by 1998. That facility was to be a
permanent repository, but DOE has announced that such a repository now cannot be
completed before 2010. In July 1996, the United States Court of Appeals for the
District of Columbia Circuit (D.C. Circuit) ruled that the DOE has an obligation
to start disposing of spent nuclear fuel no later than January 31, 1998. By way
of letter dated December 17, 1996, DOE informed contract holders, including APS,
that DOE anticipates that it will be unable to begin acceptance of spent nuclear
fuel for disposal in a repository or interim storage facility by January 31,
1998. In November 1997, the D.C. Circuit issued a Writ of Mandamus precluding
DOE from excusing its own delay on the grounds that DOE has not yet prepared a
permanent repository or interim storage facility. Several bills have been
introduced in Congress contemplating the construction of a central interim
storage facility which could be available in the latter part of the current
decade; however, there is resistance to certain features of these bills both in
Congress and the Administration.
Facility funding is a further complication. While all nuclear utilities pay
into a so-called nuclear waste fund an amount calculated on the basis of the
output of their respective plants, the annual Congressional appropriations for
the permanent repository have been for amounts less than the amounts paid into
the waste fund (the balance of which is being used for other purposes) and,
according to DOE spokespersons, may now be at a level less than needed to
achieve a 2010 operational date for a permanent repository. No funding will be
available for a central interim facility until one is authorized by Congress.
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APS has storage capacity in existing fuel storage pools at Palo Verde
which, with certain modifications, could accommodate all fuel expected to be
discharged from normal operation of Palo Verde through about 2002, and believes
it could augment that wet storage with new facilities for on-site dry storage of
spent fuel for an indeterminate period of operation beyond 2002, subject to
obtaining any required governmental approvals. One way or another, APS currently
believes that spent fuel storage or disposal methods will be available for use
by Palo Verde to allow its continued operation beyond 2002.
A new low-level waste facility was built in 1995 on-site which could store
an amount of waste equivalent to ten years of normal operation at Palo Verde.
Although some low-level waste has been stored on-site, APS is currently shipping
low-level waste to off-site facilities. APS currently believes that interim
low-level waste storage methods are or will be available for use by Palo Verde
to allow its continued operation and to safely store low-level waste until a
permanent disposal facility is available.
While believing that scientific and financial aspects of the issues of
spent fuel and low-level waste storage and disposal can be resolved
satisfactorily, APS acknowledges that their ultimate resolution in a timely
fashion will require political resolve and action on national and regional
scales which it is less able to predict.
Purchased Power Agreements
In addition to that available from its own generating capacity (see
"Properties" in Item 2), APS purchases electricity from other utilities under
various arrangements. One of the most important of these is a long-term contract
with SRP which may be canceled by SRP on three years' notice and which requires
SRP to make available, and APS to pay for, certain amounts of electricity that
are based in large part on customer demand within certain areas now served by
APS pursuant to a related territorial agreement. The generating capacity
available to APS pursuant to the contract was 297 MW through May 1997, at which
time the capacity decreased to 292 MW. In 1997, APS received approximately
610,400 MWh of energy under the contract and paid approximately $37 million for
capacity availability and energy received.
In September 1990, APS and PacifiCorp entered into certain agreements
relating principally to sales and purchases of electric power and electric
utility assets, and in July 1991 APS sold Cholla 4 to PacifiCorp. As part of the
transaction, PacifiCorp agreed to make a firm system sale to APS for thirty
years during APS' summer peak season in the amount of 175 megawatts for the
first five years, increasing thereafter, at APS' option, up to a maximum amount
equal to the rated capacity of Cholla 4 (380 megawatts). APS also had the option
to convert these firm system sales to one-for-one seasonal capacity exchanges
with PacifiCorp. APS' agreements with PacifiCorp currently provide for the
following Company purchases and one-for-one seasonal capacity exchanges during
the indicated years: 1998 (175 megawatt firm capacity purchase, converting to
capacity exchange in the summer of 1998; and 100 megawatt capacity exchange);
1999 and beyond (275 megawatt capacity exchange; and 205 megawatt capacity
exchange beginning in the summer of 1999). In 1997, the generating capacity
available to APS from PacifiCorp was 175 MW. APS received approximately 486,000
MWh of energy and paid approximately $17.4 million for capacity availability and
the energy received.
During 1996, APS entered into an agreement with Citizens Utilities Company
to build, own, operate and maintain a combustion turbine in northwest Arizona.
Pursuant to a twenty-year purchase power agreement, APS will recover the cost of
the turbine and CUC will pay for the output requested by CUC. APS has the right
to secondary use of the output for cost of fuel and variable operations and
maintenance. APS expects that the combustion turbine will be in service during
the first quarter of 2001.
Construction Program
During the years 1995 through 1997, APS incurred approximately $824 million
in capitalized expenditures. Utility capitalized expenditures for the years 1998
through 2000 are expected to be primarily for expanding transmission and
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distribution capabilities to meet customer growth, upgrading existing
facilities, and for environmental purposes. Capitalized expenditures, including
expenditures for environmental control facilities, for the years 1998 through
2000 have been estimated as follows:
(Millions of Dollars)
By Year By Major Facilities
- ------------------------------ --------------------------------------
Production $235
1998 $323 Transmission and Distribution 565
1999 313 General 119
2000 306 Other Projects 23
---- ---
$942 $942
==== ====
The amounts for 1998 through 2000 exclude capitalized interest costs and
include capitalized property taxes and about $30-$35 million each year for
nuclear fuel. APS conducts a continuing review of its construction program.
Mortgage Replacement Fund Requirements
So long as any of APS' first mortgage bonds are outstanding, APS is
required for each calendar year to deposit with the trustee under its Mortgage
cash in a formularized amount related to net additions to APS' mortgaged utility
plant; however, APS may satisfy all or any part of this "replacement fund"
requirement by utilizing redeemed or retired bonds, net property additions, or
property retirements. For 1997, the replacement fund requirement amounted to
approximately $134 million. All of the bonds issued by APS under the Mortgage
which are callable prior to maturity are redeemable at their par value plus
accrued interest with cash deposited by APS in the replacement fund, subject in
many cases to a period of time after the original issuance of the bonds during
which they may not be so redeemed and/or to other restrictions on any such
redemption.
Environmental Matters
EPA Environmental Regulation
Clean Air Act. Pursuant to the 1977 amendments to the Clean Air Act, the
EPA adopted regulations that address visibility impairment in certain
federally-protected areas which can be reasonably attributed to specific
sources. In September 1991, the EPA issued a final rule that would limit sulfur
dioxide emissions at NGS. Compliance with the emission limitation became
applicable to one NGS unit in 1997 and becomes applicable to another unit in
1998 and to the last unit in 1999. SRP, the NGS operating agent, has estimated a
capital cost of $440 million and annual operations and maintenance costs of
approximately $14 million for all three units, for NGS to meet these
requirements. APS is required to fund 14% of these expenditures. Approximately
80% of these capital costs have been incurred through 1997.
The Clean Air Act Amendments of 1990 (the "Amendments") address, among
other things, "acid rain," visibility in certain specified areas, toxic air
pollutants and the nonattainment of national ambient air quality standards. With
respect to "acid rain," the Amendments establish a system of sulfur dioxide
emissions "allowances." Each existing utility unit is granted a certain number
of "allowances." For Phase II plants, which includes APS-owned plants,
allowances will be required beginning in the year 2000 to operate the plants. On
March 5, 1993, the EPA promulgated rules listing allowance allocations
applicable to APS-owned plants. Based on those allocations, APS will have
sufficient allowances to permit continued operation of its plants at current
levels without installing additional equipment. In addition, the Amendments
require the EPA to set nitrogen oxides emissions limitations which would require
certain plants to install additional pollution control equipment. In December
1996, the EPA issued rules for nitrogen oxides emissions limitations that may
require APS to install additional pollution control equipment at Four Corners by
January
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1, 2000. Based on its initial evaluation, APS currently estimates its capital
cost of complying with the rules may be approximately $4 million. On February
14, 1997, APS filed a Petition for Review in the United States Court of Appeals
for the District of Columbia alleging that the EPA improperly classified Four
Corners Unit 4 in these rules, thereby subjecting Unit 4 to a more stringent
emission limitation. Arizona Public Service Company v. United States
Environmental Protection Agency, No. 97-1091. In February 1998, the Court
vacated the Unit 4 emission limitation and remanded the issue to EPA for
reconsideration. APS cannot currently predict how the EPA will respond.
With respect to protection of visibility in certain specified areas, the
Amendments require the EPA to conduct a study concerning visibility impairment
in those areas and identification of sources contributing to such impairment.
Interim findings of this study have indicated that any beneficial effect on
visibility as a result of the Amendments would be offset by expected population
and industry growth. The EPA has established a "Grand Canyon Visibility
Transport Commission" to complete a study on visibility impairment in the
"Golden Circle of National Parks" in the Colorado Plateau. NGS, Cholla, and Four
Corners are located near the "Golden Circle of National Parks." The Commission
completed its study and on June 10, 1996 submitted its final recommendations to
the EPA. The Commission recommended that, beginning in 2000 and every 5 years
thereafter, if actual sulfur dioxide emissions from all stationary sources in an
eight-state region (including Arizona, New Mexico, Utah, Nevada, and California)
exceed the projected emissions, which are projected to decline under the current
regulatory scheme, the projected total emissions will be changed to a "regional
emissions cap" and an emissions trading program would be implemented to limit
total sulfur dioxide emissions in the region. The EPA will consider these
recommendations before promulgating final requirements on a regional haze
regulatory program which is under EPA review, which is expected by June 1998. If
such a program were implemented, industry, including APS' coal plants, could be
subject to further emissions limits. APS cannot currently estimate the capital
expenditures, if any, which may be required as a result of the EPA studies and
the Commission's recommendations.
In July 1997, the EPA proposed regulations on regional haze. The proposal
would require states to submit plans to meet "presumptive reasonable progress
targets" for achieving perceptible improvements in visibility conditions in
Federal Class I areas (e.g., national parks) every 10-15 years. The proposal
also calls for states to conduct three year "best available retrofit technology"
("BART") review on point sources which became operational between 1962 and 1977
and which may normally be anticipated to contribute to regional haze visibility
impairment. EPA is currently reviewing public comments and final regulations are
expected to be promulgated by June 1998. Because the actual level of emissions
controls, if any, for any unit cannot be determined at this time, APS currently
cannot estimate the capital expenditures, if any, which would result from the
final rules.
With respect to hazardous air pollutants emitted by electric utility steam
generating units, the Amendments require two studies. The results of the first
study indicated an impact from mercury emissions from such units in certain
unspecified areas; however, the EPA has not yet stated whether or not emissions
limitations will be imposed. Next, the EPA will complete a general study by 1999
concerning the necessity of regulating such units under the Amendments. Due to
the lack of historical data, and because APS cannot speculate as to the ultimate
requirements by the EPA, APS cannot currently estimate the capital expenditures,
if any, which may be required as a result of these studies.
Certain aspects of the Amendments may require related expenditures by APS,
such as permit fees, none of which APS expects to have a material impact on its
financial position or results of operations.
Also, in July 1997, EPA promulgated final National Ambient Air Quality
Standards for ozone and particulate matter. Pursuant to the rules, the ozone
standard is more stringent and a new ambient standard for very fine particles
has been established. APS does not currently expect these rules to have a
material adverse effect on its financial position or results of operations.
Superfund. The Comprehensive Environmental Response, Compensation, and
Liability Act ("Superfund") establishes liability for the cleanup of hazardous
substances found contaminating the soil, water or air. Those who
10
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generated, transported, or disposed of hazardous substances at a contaminated
site are among those who are potentially responsible parties ("PRP's") and may
be each strictly, and often jointly and severally, liable for the cost of any
necessary remediation of the substances. The EPA had previously advised APS that
the EPA considers APS to be a PRP in the Indian Bend Wash Superfund Site, South
Area, where APS' Ocotillo Power Plant is located. APS is in the process of
conducting a voluntary investigation to determine the extent and scope of
contamination at the plant site. Based on the information to date, APS does not
expect this matter to have a material impact on its financial position or
results of operations.
MGP Sites. APS currently is investigating properties, either presently or
previously owned by APS, which were at one time sites of, or sites associated
with, manufactured gas plants. The purpose of this investigation is to determine
if waste materials are present, if such materials constitute an environmental or
health risk, and if APS has any responsibility for remedial action. Where
appropriate, APS has begun remediation of certain of these sites. APS does not
expect these matters to have a material adverse effect on its financial position
or results of operations.
Purported Navajo Environmental Regulation
Four Corners and NGS are located on the Navajo Reservation and are held
under easements granted by the federal government as well as leases from the
Navajo Nation. APS is the Four Corners operating agent and owns a 100% interest
in Four Corners Units 1, 2 and 3, and a 15% interest in Four Corners Units 4 and
5. APS owns a 14% interest in NGS Units 1, 2 and 3. In July 1995, the Navajo
Nation enacted the Navajo Nation Air Pollution Prevention and Control Act, the
Navajo Nation Safe Drinking Water Act, and the Navajo Nation Pesticide Act
(collectively, the "Acts").
Pursuant to the Acts, the Navajo Nation Environmental Protection Agency is
authorized to promulgate regulations covering air quality, drinking water and
pesticide activities, including those that occur at Four Corners and NGS. By
separate letters dated October 12 and October 13, 1995, the Four Corners
participants and the NGS participants requested the United States Secretary of
the Interior to resolve their dispute with the Navajo Nation regarding whether
or not the Acts apply to operations of Four Corners and NGS. On October 17,
1995, the Four Corners participants and the NGS participants each filed a
lawsuit in the District Court of the Navajo Nation, Window Rock District,
seeking, among other things, a declaratory judgment that (i) their respective
leases and federal easements preclude the application of the Acts to the
operations of Four Corners and NGS, and (ii) the Navajo Nation and its agencies
and courts lack adjudicatory jurisdiction to determine the enforceability of the
Acts as applied to Four Corners and NGS. On October 18, 1995, the Navajo Nation
and the Four Corners and NGS participants agreed to indefinitely stay the
proceedings referenced in the preceding two sentences so that the parties may
attempt to resolve the dispute without litigation, and the Secretary and the
Court have stayed these proceedings pursuant to a request by the parties. APS
cannot currently predict the outcome of this matter.
In February 1998, the EPA promulgated regulations specifying those
provisions of the Clean Air Act for which it is appropriate to treat Indian
tribes in the same manner as states. The EPA indicated that it believes that the
Clean Air Act generally would supersede pre-existing binding agreements that may
limit the scope of tribal authority over reservations. APS is reviewing the
regulations to determine what effect they might have on the application of the
Navajo Nation Air Pollution Prevention and Control Act on Four Corners and NGS.
Water Supply
Assured supplies of water are important both to APS (for its generating
plants) and to its customers and, at the present time, APS has adequate water to
meet its needs. However, conflicting claims to limited amounts of water in the
southwestern United States have resulted in numerous court actions in recent
years.
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Both groundwater and surface water in areas important to APS' operations
have been the subject of inquiries, claims and legal proceedings which will
require a number of years to resolve. APS is one of a number of parties in a
proceeding before a state court in New Mexico to adjudicate rights to a stream
system from which water for Four Corners is derived. (State of New Mexico, in
the relation of S.E. Reynolds, State Engineer v. United States of America, City
of Farmington, Utah International, Inc., et al., San Juan County, New Mexico,
District Court No. 75-184). An agreement reached with the Navajo Nation in 1985,
however, provides that if Four Corners loses a portion of its rights in the
adjudication, the Navajo Nation will provide, for a then-agreed upon cost,
sufficient water from its allocation to offset the loss.
A summons served on APS in early 1986 required all water claimants in the
Lower Gila River Watershed in Arizona to assert any claims to water on or before
January 20, 1987, in an action pending in Maricopa County Superior Court. (In re
The General Adjudication of All Rights to Use Water in the Gila River System and
Source, Supreme Court Nos. WC-79-0001 through WC 79-0004 (Consolidated) [WC-1,
WC-2, WC-3 and WC-4 (Consolidated)], Maricopa County Nos. W-1, W-2, W-3 and W-4
(Consolidated)). Palo Verde is located within the geographic area subject to the
summons, and the rights of the Palo Verde participants, including APS, to the
use of groundwater and effluent at Palo Verde is potentially at issue in this
action. APS, as project manager of Palo Verde, filed claims that dispute the
court's jurisdiction over the Palo Verde participants' groundwater rights and
their contractual rights to effluent relating to Palo Verde and, alternatively,
seek confirmation of such rights. Three of APS' less-utilized power plants are
also located within the geographic area subject to the summons. APS' claims
dispute the court's jurisdiction over APS' groundwater rights with respect to
these plants and, alternatively, seek confirmation of such rights. On December
10, 1992, the Arizona Supreme Court heard oral argument on certain issues in
this matter which are pending on interlocutory appeal. Issues important to APS'
claims were remanded to the trial court for further action and the trial court
certified its decision for interlocutory appeal to the Arizona Supreme Court. On
September 28, 1994, the Arizona Supreme Court granted review of the trial court
decision. No trial date concerning the water rights claims of APS has been set
in this matter.
APS has also filed claims to water in the Little Colorado River Watershed
in Arizona in an action pending in the Apache County Superior Court. (In re The
General Adjudication of All Rights to Use Water in the Little Colorado River
System and Source, Supreme Court No. WC-79-0006 WC-6, Apache County No. 6417).
APS' groundwater resource utilized at Cholla is within the geographic area
subject to the adjudication and is therefore potentially at issue in the case.
APS' claims dispute the court's jurisdiction over APS' groundwater rights and,
alternatively, seek confirmation of such rights. The parties are in the process
of settlement negotiations with respect to this matter. No trial date concerning
the water rights claims of APS has been set in this matter.
Although the foregoing matters remain subject to further evaluation, APS
expects that the described litigation will not have a material adverse impact on
its financial position or results of operations.
BUSINESS OF SUNCOR DEVELOPMENT COMPANY
SunCor was incorporated in 1965 under the laws of the State of Arizona and
is engaged primarily in the owning, development, and sale of real property,
including homebuilding. The principal executive offices of SunCor are located at
3838 North Central, Suite 1500, Phoenix, Arizona 85012 (telephone 602-285-6800).
SunCor and its subsidiaries, excluding SunCor Resort & Golf Management, Inc.
("Resort Management"), employ approximately 140 persons. Resort Management,
which manages the Wigwam Resort and Country Club (the "Wigwam") golf and other
operations, employs between 620 and 750 persons at the Wigwam, depending on the
Wigwam's operating season. Resort Management also operates golf and other
operations which employ approximately 300 persons.
Effective January 1, 1996, SunCor's homebuilding subsidiary, SunCor Homes,
Inc., purchased the assets of Golden Heritage Homes. Subsequent to December 31,
1996, SunCor Homes, Inc. changed its name to Golden Heritage Homes, Inc.
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SunCor's projects consist primarily of land and improvements and other real
estate investments. SunCor owns approximately 11,000 acres west of Phoenix in
the area of Goodyear/Litchfield Park, Arizona ("Palm Valley"), including a
private water and sewer company to provide those utility services to the
property. A portion of the undeveloped property is currently being used for
agricultural purposes. SunCor has completed the master-plan for developing Palm
Valley. The commercial and residential development of approximately 768 acres is
well underway and includes an 18-hole championship golf course. In addition,
within the Palm Valley project, SunCor has entered into joint ventures to
develop 2,200 acres as a retirement community, known as PebbleCreek, 350 acres
as a planned area development, known as Litchfield Greens, and a 130-unit
apartment complex known as the Palm Valley Apartments. Commercial development in
Palm Valley includes the Wigwam Outlet Stores and Palm Valley MarketPlace;
approximately 309,000 square feet of retail space; and the Palm Valley Crossing,
an approximately 99 acre mixed-use commercial center.
SunCor's projects under development also include acquisition of a 1,400
acre master-planned community north of Phoenix called Tatum Ranch, a 1,400 acre
master-planned community northeast of Phoenix called Scottsdale Mountain, a 140
acre master-planned project for business use northwest of Phoenix called Talavi
and a 420 acre master-planned project for business use east of Phoenix called
MarketPlace. SunRidge Canyon, a 950 acre golf and residential master-planned
community northeast of Phoenix, and Sedona Golf Resort, a 300 acre golf and
residential master-planned community near Sedona, Arizona are also being
developed jointly with other venture partners. In 1996, SunCor acquired an
option to develop a 21,000 acre master-planned community as a joint venture in
Santa Fe, New Mexico called Rancho Viejo. The initial 2,500 acres are under
development.
For the years ended December 31, 1997, 1996, and 1995, SunCor's operating
revenues were approximately $116.5 million, $99.5 million, and $54.8 million,
respectively, and its income was approximately $5.3 million, $4.2 million, and
$4.1 million, respectively. SunCor's capital needs consist primarily of capital
expenditures and home construction, which, on the basis of projects now under
development, are expected to approximate $45 million, $58 million, and $51
million for 1998, 1999, and 2000, respectively.
At December 31, 1997, SunCor had total assets of approximately $403
million. See Note 6 of Notes to the Consolidated Financial Statements in Item 8
for information regarding SunCor's long-term debt. SunCor intends to continue
its focus on real estate development in homebuilding and the development of
residential, commercial, and industrial projects.
BUSINESS OF EL DORADO DEVELOPMENT COMPANY
El Dorado was incorporated in 1983 under the laws of the State of Arizona
and is engaged principally in the business of making equity investments in other
companies. El Dorado's short-term goal is to convert its venture capital
portfolio to cash as quickly and as advantageously as possible. On a long-term
basis, the Company may use El Dorado, when appropriate, as its subsidiary for
new ventures that are strategically close to the Company's principal business of
generating, distributing, and marketing electricity. El Dorado's offices are
located at 400 East Van Buren Street, Suite 750, Phoenix, Arizona 85004
(telephone 602-379-2662).
El Dorado had investments in venture capital partnerships totaling
approximately $7.4 million at December 31, 1997. In addition to the foregoing
investments, at December 31, 1997, El Dorado had direct investments of
approximately $13.8 million in other private and public companies and
partnerships. These investments include a 49% interest in NAC International, a
company that specializes in nuclear spent fuel storage and transportation
technology, as well as nuclear fuel cycle and international energy policy
consulting.
For the years ended December 31, 1997, 1996, and 1995, El Dorado's net
income was approximately $8.2 million, $0.4 million, and $8.5 million,
respectively. At December 31, 1997, El Dorado had total assets of approximately
$34.5 million.
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ITEM 2. PROPERTIES
Accredited Capacity
APS' present generating facilities have an accredited capacity aggregating
3,986,900 kW, comprised as follows:
<TABLE>
<CAPTION>
Capacity(kW)
------------
<S> <C> <C>
Coal:
Units 1, 2 and 3 at Four Corners, aggregating............................................... 560,000
15% owned Units 4 and 5 at Four Corners, representing....................................... 222,000
Units 1, 2 and 3 at Cholla Plant, aggregating............................................... 615,000
14% owned Units 1, 2 and 3 at the Navajo Plant, representing................................ 315,000
---------
1,712,000
=========
Gas or Oil:
Two steam units at Ocotillo and two steam units at Saguaro, aggregating..................... 435,000(1)
Eleven combustion turbine units, aggregating................................................ 493,000
Three combined cycle units, aggregating..................................................... 255,000
---------
1,183,000
=========
Nuclear:
29.1% owned or leased Units 1, 2 and 3 at Palo Verde, representing.......................... 1,086,300
=========
Other............................................................................................ 5,600
=========
</TABLE>
- ---------------
(1) West Phoenix steam units (108,300 kW) are currently mothballed.
-----------------------------------------------------
Reserve Margin
APS' peak one-hour demand on its electric system was recorded on August 22,
1997 at 4,608,600 kW, compared to the 1996 peak of 4,574,700 kW recorded on July
31. Taking into account additional capacity then available to it under purchase
power contracts as well as its own generating capacity, APS' capability of
meeting system demand on August 22, 1997, computed in accordance with accepted
industry practices, amounted to 4,544,600 kW, for an installed reserve margin of
(1.5%). The power actually available to APS from its resources fluctuates from
time to time due in part to planned outages and technical problems. The
available capacity from sources actually operable at the time of the 1997 peak
amounted to 5,877,600 kW, for a margin of 9.1%. Firm purchases from neighboring
utilities totaling 1,603,000 kW were in place at the time of the peak ensuring
the ability to meet the load requirement.
Plant Sites Leased from Navajo Nation
NGS and Four Corners are located on land held under easements from the
federal government and also under leases from the Navajo Nation. The risk with
respect to enforcement of these easements and leases is not deemed by APS to be
material. The lease for Four Corners contains a waiver until 2001 of the
requirement that APS and its fuel supplier pay certain taxes to the 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. Pursuant to the
agreement, APS recognized approximately $14 million of pretax earnings related
to a partial 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
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the electricity generated at Four Corners to be priced competitively. APS cannot
currently predict the outcome of this matter. Certain of APS' transmission lines
and almost all of its contracted coal sources are also located on Indian
reservations. See "Generating Fuel and Purchased Power --- Coal Supply" in Item
1.
Palo Verde Nuclear Generating Station
Palo Verde Leases
On August 18, 1986 and December 19, 1986, APS entered into a total of three
sale and leaseback transactions under which it sold and leased back
approximately 42% of its 29.1% ownership interest in Palo Verde Unit 2. The
leases under each of the sale and leaseback transactions have initial lease
terms expiring on December 31, 2015. Each of the leases also allows APS to
extend the term of the lease and/or to repurchase the leased Unit 2 interest
under certain circumstances at fair market value. The leases in the aggregate
require annual payments of approximately $40 million through 1999, approximately
$46 million in 2000 and approximately $49 million through 2015 (see Note 10 of
Notes to Financial Statements in Item 8).
Regulatory
Operation of each of the three Palo Verde units requires an operating
license from the NRC. Full power operating licenses for Units 1, 2 and 3 were
issued by the NRC in June 1985, April 1986 and November 1987, respectively. The
full power operating licenses, each valid for a period of approximately 40
years, authorize APS, as operating agent for Palo Verde, to operate the three
Palo Verde units at full power.
Nuclear Decommissioning Costs
See Note 13 of Notes to Financial Statements in Item 8 for a discussion of
APS' nuclear decommissioning costs.
Steam Generators
See "Palo Verde Nuclear Generating Station" in Note 12 of Notes to
Financial Statements in Item 8 for a discussion of issues relating to the Palo
Verde steam generators.
Palo Verde Liability and Insurance Matters
See "Palo Verde Nuclear Generating Station" in Note 12 of Notes to
Financial Statements in Item 8 for a discussion of the insurance maintained by
the Palo Verde participants, including APS, for Palo Verde.
Other Information Regarding APS' Properties
See "Environmental Matters" and "Water Supply" in Item 1 with respect to
matters having possible impact on the operation of certain of APS' power plants.
See "Construction Program" in Item 1 and "Financial Review --- Capital
Needs and Resources" in Item 7 for a discussion of APS' construction plans.
See Notes 6, 10 and 11 of Notes to Financial Statements in Item 8 with
respect to property of APS not held in fee or held subject to any major
encumbrance.
Information Regarding SunCor's and El Dorado's Properties
15
<PAGE>
See "Business of SunCor Development Company" and "Business of El Dorado
Investment Company" for information regarding SunCor's and El Dorado's
properties.
16
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[MAP PAGE]
In accordance with Item 304 of Regulation S-T of the Securities Exchange
Act of 1934, APS' Service Territory map contained in this Form 10-K is a map of
the State of Arizona showing APS' service area, the location of its major power
plants and principal transmission lines, and the location of transmission lines
operated by APS for others. The major power plants shown on such map are the
Navajo Generating Station located in Coconino County, Arizona; the Four Corners
Power Plant located near Farmington, New Mexico; the Cholla Power Plant, located
in Navajo County, Arizona; the Yucca Power Plant, located near Yuma, Arizona;
and the Palo Verde Nuclear Generating Station, located about 55 miles west of
Phoenix, Arizona (each of which plants is reflected on such map as being jointly
owned with other utilities), as well as the Ocotillo Power Plant and West
Phoenix Power Plant, each located near Phoenix, Arizona, and the Saguaro Power
Plant, located near Tucson, Arizona. APS' major transmission lines shown on such
map are reflected as running between the power plants named above and certain
major cities in the State of Arizona. The transmission lines operated for others
shown on such map are reflected as running from the Four Corners Plant through a
portion of northern Arizona to the California border.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
APS
Property Taxes
See "Environmental Matters" and "Water Supply" in Item 1 in regard to
pending or threatened litigation and other disputes. See "Regulatory Matters" in
Note 3 of Notes to Financial Statements in Item 8 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 (Arizona Public
Service Company v. The Arizona Corporation Commission, in the Superior Court of
the State of Arizona in and for the County of Maricopa, No. CV97-03753, and
Arizona Public Service Company v. The Arizona Corporation Commission, in the
Court of Appeals, State of Arizona, Division One, No. 1 CA-CC-97-0002, ACC
Docket No. R-0000- 94-165). That lawsuit is pending but two related cases filed
by other utilities have been decided adversely to the utilities' positions.
Pinnacle West
On April 22, 1991 a lawsuit was filed in the United States District Court
of Arizona by the Resolution Trust Corporation (the "RTC") against certain
former officers and directors of MeraBank. The suit sought, among other things,
damages in excess of $270 million, and alleged claims for negligence, gross
negligence, breach of fiduciary duty, breach of duty of loyalty and breach of
contract with respect to the management and operation of MeraBank by the
defendants beginning in the early 1980s. On December 30, 1993, and as the result
of a negotiated settlement, the United States District Court for the District of
Arizona (the "Arizona District Court") entered orders and final judgments that,
among other matters, partially dismissed the litigation described above. Two
non-settling individuals who pursued independent claims against the RTC were not
dismissed from the RTC litigation.
The non-settling individuals have filed a third-party complaint against the
Company in the Arizona District Court alleging claims for contractual and
statutory indemnification in the event that these individuals are found liable
on the RTC's claims against them. The third-party complaint, which was served on
the Company on or about November 13, 1995, further alleges that the Company
acted in bad faith and wrongfully denied indemnification to these individuals
and seeks compensatory and punitive damages in an unspecified amount as well as
costs and attorneys' fees. In addition, one of these individuals seeks a
judicial determination that the Company is obligated to pay him pension benefits
in an unspecified amount in the event that the RTC does not fully pay these
benefits. The December 30, 1993 settlement order barred the non-settling
individuals from asserting claims for contribution and certain claims for
noncontractual indemnification against the Company. On February 3, 1997, the
Arizona District Court granted summary judgment in favor of the Company and
ordered the dismissal of this third-party complaint with prejudice. On February
18, 1997, the Company filed a motion with the court requesting entry of a
judgment and order of dismissal with prejudice and requesting certification of
the judgment as final. On March 27, 1997, the court granted the Company's motion
and entered a final judgment and order of dismissal with prejudice in favor of
the Company. On April 24, 1997, the plaintiffs filed a notice of appeal with
respect to the court's ruling. On February 4, 1998, the Company entered into a
settlement with the plaintiffs, and on February 24, 1998, the court entered an
order dismissing the appeal with prejudice.
On January 18, 1991, a lawsuit was filed in the United States District
Court, Southern District of Ohio, Western Division, against, among other
parties, the Company and certain of its officers and directors, the Office of
Thrift Supervision ("OTS"), the RTC and the Federal Deposit Insurance
Corporation ("FDlC"). The amended complaint in this lawsuit alleges that the
plaintiff purchased MeraBank subordinated debentures with a face amount of $ 1
million
18
<PAGE>
in 1987 in reliance upon a capital maintenance stipulation executed by the
Company as a condition to the Company's acquisition of MeraBank. The plaintiff
further alleges that the value of such debentures was impaired because of the
Company's release from its purported obligations under the stipulation and the
actions of the OTS in placing MeraBank in receivership. The amended complaint
alleges claims under the federal securities laws, the federal racketeering
statutes, and state consumer fraud statutes and seeks damages in the approximate
amount of $4.8 million, plus interest. On June 8,1993, the Ohio court ordered
this case to be transferred to the District of Arizona. The individual director
defendants were subsequently dismissed without prejudice pursuant to the
stipulation of the parties. On November 10, 1994, the Company filed a motion for
summary judgment on all counts, which on September 20, 1995 was granted in part
and denied in part. The order rejected the plaintiff's claims as to one of the
two purchases of MeraBank debentures at issue, and accordingly, reduced the
amount in controversy to one-half of the original claimed amount. On October 4,
1996, the plaintiff filed a motion to amend its complaint to broaden the factual
basis for its claims under theories of securities fraud, racketeering and
consumer fraud. On December 12, 1997, the parties entered into a settlement
agreement. Pursuant to the terms of the settlement agreement, funds in an amount
not material to the Company have been paid to plaintiff in full and final
settlement of this litigation. On December 16, 1997, the court issued a formal
order dismissing the lawsuit.
On August 17, 1993, the Company was served with a separate complaint filed
by the same plaintiff in the United States District Court for the District of
Arizona alleging claims under the Arizona Racketeering Act and the Arizona
Consumer Fraud Act seeking compensatory damages in the amount of $ 1.2 million
plus interest, punitive damages, treble damages, interest, attorneys' fees and
costs. On September 24, 1993, the plaintiff voluntarily dismissed the Arizona
Consumer Fraud Act claims. On March 6, 1995, the court dismissed the Arizona
Racketeering Act claims. The plaintiff filed a motion for reconsideration which
was denied. On April 5, 1995, the plaintiff appealed the dismissal to the Ninth
Circuit Court of Appeals. The appeal was denied, and the plaintiff filed a
motion for reconsideration. As part of the December 12, 1997 settlement
agreement described above, the parties filed a joint stipulation for withdrawal
of the motion for reconsideration. A formal mandate withdrawing the motion has
not yet been issued by the court.
On May 1, 1991, a lawsuit was filed in the United States District Court for
the District of Arizona against the Company by another purchaser of the same
issue of MeraBank subordinated debentures referred to above. This plaintiff also
claims to have purchased the debentures, with a face amount of approximately
$12.4 million, in reliance upon the stipulation. The suit further alleges that
the Company induced the plaintiff to retain its investment in the debentures by
representing to the plaintiff that the Company would keep MeraBank capitalized
in accordance with federal regulatory requirements. The suit alleges violations
of federal and state securities laws, fraud, negligent representation,
promissory estoppel, racketeering and intentional interference with contractual
relations. On October 7, 1994, the court dismissed the plaintiff's federal
securities law claims. On May 4, 1995, the court granted the Company's motion
for reconsideration and also dismissed plaintiff's state securities law claims.
The plaintiff sought unspecified compensatory and punitive damages and requested
that the compensatory damages be trebled under the Arizona Racketeering Act. On
December 10, 1996, the parties executed a settlement agreement and mutual
release in full and final settlement of this litigation. Settlement funds in an
amount not material to the Company have been paid to plaintiff. The parties have
filed a joint stipulation for dismissal with prejudice of the lawsuit. A formal
order dismissing the lawsuit has not yet been issued by the court.
On December 22, 1993, the Company was served with a complaint filed by
other purchasers of MeraBank subordinated debentures with a face amount of
approximately $ 1.5 million alleging claims substantially similar to the claims
described in the preceding paragraph. The complaint, which was filed in the
Arizona District Court, seeks compensatory and punitive damages in an
unspecified amount plus attorneys' fees and costs. On October 6, 1995, the
Company filed a motion for summary judgment seeking dismissal of the suit based
on, among other things, a claim that the applicable statute of limitations had
expired. On November 13, 1995, the plaintiffs filed a cross-motion for partial
summary judgment with respect to certain of the Company's alleged
misrepresentations and omissions and asserted a fraudulent concealment defense
to the expiration of the applicable statutes of limitations. On April 12, 1996,
the court granted the Company's motion for summary judgment and dismissed
plaintiffs' claims with prejudice. On May 13,
19
<PAGE>
1996, plaintiffs filed a notice of appeal to the Ninth Circuit Court of Appeals.
On July 8, 1997, the Ninth Circuit affirmed the grant of summary judgment in
favor of the Company. No further appellate proceedings have been undertaken by
the plaintiffs, and the Ninth Circuit's affirmance of the Arizona District
Court's grant of summary judgment in favor of the Company is final.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report, through the solicitation of
proxies or otherwise.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS
OF THE REGISTRANT
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
Name Age at March 1, 1998 Position(s) at March 1, 1998
- ---- -------------------- ----------------------------
<S> <C> <C>
Michael S. Ash 44 Corporate Counsel
James L. Kunkel 60 Vice President
Arlyn J. Larson 63 Vice President of Corporate Planning and
Development
Michael V. Palmeri 39 Treasurer
William J. Post 47 President
George A. Schreiber, Jr. 49 Executive Vice President and Chief Financial
Officer
Richard Snell 67 Chairman of the Board of Directors and Chief
Executive Officer
Faye Widenmann 49 Vice President of Corporate Relations and
Administration and Secretary
</TABLE>
The executive officers of the Company are elected no less often than
annually and may be removed by the Board of Directors at any time. The terms
served by the named officers in their current positions and the principal
occupations (in addition to those stated in the table) of such officers for the
past five years have been as follows:
Mr. Ash was elected Corporate Counsel of the Company in February 1991. He
previously held the position of Legal Counsel to the Company from December 1986
to February 1991.
Mr. Kunkel was elected Vice President of the Company effective December 15,
1997. Prior to December 1997, he was a partner in the Phoenix office of the
accounting firm of Coopers & Lybrand.
Mr. Larson was elected Vice President, Corporate Planning and Development
in July 1986.
Mr. Palmeri was elected to the position of Treasurer of both the Company
and APS effective July 23, 1997. From February 1994 to July 1997, he was
Assistant Treasurer of the Company. From June 1990 to February 1994, he was
Manager of Finance of the Company.
Mr. Post was elected President of the Company effective February 5, 1997
after having served as its Executive Vice President since June 1995. He has also
been the President and Chief Executive Officer of APS since February 1997.
20
<PAGE>
He has been APS' Chief Operating Officer since September 1994, as well as a
Senior Vice President since June 1993. Prior to that time, he had served as a
Vice President of APS since 1982. Mr. Post is also a director of APS.
Mr. Schreiber was elected to the positions of Executive Vice President and
Chief Financial Officer of both the Company and APS effective February 3, 1997.
From 1990 to January 1997, he was Managing Director at PaineWebber, Inc. He is
also a director of APS.
Mr. Snell has been Chairman of the Board and Chief Executive Officer of the
Company and Chairman of the Board of APS since February 1990. Until February
1997, he was also President of the Company. Mr. Snell is also a director of
Aztar Corporation, Banc One Arizona Corporation and Central Newspapers, Inc.
Ms. Widenmann was elected Secretary of the Company in 1985 and Vice
President of Corporate Relations and Administration in November 1986.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is publicly held and is traded on the New York
and Pacific Stock Exchanges. At the close of business on March 23, 1998, the
Company's common stock was held of record by approximately 48,000 shareholders.
The chart below sets forth the common stock price ranges on the composite
tape, as reported in the Wall Street Journal for 1997 and 1996. The chart also
sets forth the dividends declared and paid per share during each of the four
quarters for 1997 and 1996.
Common Stock Price Ranges and Dividends
- --------------------------------------------------------------------------------
1997 High Low Dividend Per Share(a)
- --------------------------------------------------------------------------------
1st Quarter 32 7/8 30 1/8 $ 0.275
2nd Quarter 30 3/4 27 5/8 $ 0.550
3rd Quarter 34 7/8 29 13/16 $ ----
4th Quarter 42 3/4 33 3/16 $ 0.300
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
1st Quarter 30 1/4 26 1/4 $ 0.250
2nd Quarter 30 3/8 26 1/4 $ 0.500
3rd Quarter 30 28 $ 0.275
4th Quarter 32 1/4 29 1/2 $ ----
- --------------------------------------------------------------------------------
(a) Dividends for the third quarter of 1997 were declared in June.
Dividends for the 3rd and 4th quarters of 1996 were declared in June
and September, respectively.
21
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED DATA
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Operating revenues
Electric $ 1,878,553 $ 1,718,272 $ 1,614,952 $ 1,626,168 $ 1,602,413
Real estate 116,473 99,488 54,846 59,253 32,248
Income from continuing operations $ 235,856 $ 211,059(a) $ 199,608 $ 200,619(b) $ 169,978(c)
Loss from discontinued operations -
net of income tax (d) - (9,539) - - -
Extraordinary charge for early
retirement of debt - net
of income tax (e) - (20,340) (11,571) - -
Cumulative effect of change in
accounting for income taxes (f) - - - - 19,252
---------------------------------------------------------------------------
Net income $ 235,856 $ 181,180 $ 188,037 $ 200,619 $ 189,230
============================================================================
COMMON STOCK DATA
Book value per share - year-end $ 23.90 $ 22.51 $ 21.49 $ 20.32 $ 18.87
Earnings (loss) per average common
share outstanding
Continuing operations - basic $ 2.76 $ 2.41(a) $ 2.28 $ 2.30(b) $ 1.95
Discontinued operations - (0.11) - - -
Extraordinary charge - (0.23) (0.13) - -
Accounting change - - - - 0.22
---------------------------------------------------------------------------
Net income - basic $ 2.76 $ 2.07 $ 2.15 $ 2.30 $ 2.17
============================================================================
Continuing operations - diluted $ 2.74 $ 2.40(a) $ 2.27 $ 2.29(b) $ 1.94
Net income - diluted $ 2.74 $ 2.06 $ 2.14 $ 2.29 $ 2.16
Dividends declared per share $ 1.125 $ 1.025 $ 0.925 $ 0.825 $ 0.20
Indicated annual dividend rate -
year-end $ 1.20 $ 1.10 $ 1.00 $ 0.90 $ 0.80
Average common shares outstanding 85,502,909 87,441,515 87,419,300 87,410,967 87,241,899
TOTAL ASSETS $ 6,850,417 $ 6,989,289 $ 6,997,052 $ 6,909,752 $ 6,956,799
============================================================================
LIABILITIES AND EQUITY
Long-term debt less current maturities $ 2,244,248 $ 2,372,113 $ 2,510,709 $ 2,588,525 $ 2,633,620
Other liabilities 2,407,572 2,428,180 2,336,695 2,276,249 2,282,508
---------------------------------------------------------------------------
4,651,820 4,800,293 4,847,404 4,864,774 4,916,128
Minority interests
Non-redeemable preferred stock
of APS 142,051 165,673 193,561 193,561 193,561
Redeemable preferred stock of APS 29,110 53,000 75,000 75,000 197,610
Common stock equity 2,027,436 1,970,323 1,881,087 1,776,417 1,649,500
---------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 6,850,417 $ 6,989,289 $ 6,997,052 $ 6,909,752 $ 6,956,799
============================================================================
</TABLE>
(a) Includes an after-tax charge of $18.9 million ($0.22 per share) for a
voluntary severance program and approximately $12 million ($0.13 per share)
of income tax benefits related to capital loss carryforwards.
(b) Includes after-tax Palo Verde Unit 3 accretion income of approximately
$20.3 million and a non-recurring income tax benefit of $26.8 million
($0.31 per share) related to a change in tax law.
(c) Includes after-tax Palo Verde Unit 3 accretion income of approximately
$45.3 million.
(d) Charges associated with the settlement of a legal matter related to
MeraBank, A Federal Savings Bank.
(e) Charges associated with the repayment or refinancing of the parent
company's high-coupon debt.
(f) Results of the adoption of the liability method of accounting for income
taxes in accordance with SFAS No. 109.
22
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ELECTRIC OPERATING REVENUES
Residential $ 744,952 $ 721,219 $ 672,794 $ 675,418 $ 627,732
Commercial 687,165 677,731 652,171 632,454 610,730
Industrial 164,456 161,636 156,666 166,606 169,154
Irrigation 8,733 9,495 9,571 10,548 9,246
Other 11,860 12,825 12,626 12,730 11,794
-------------------------------------------------------------------
Total retail 1,617,166 1,582,906 1,503,828 1,497,756 1,428,656
Sales for resale 226,828 98,560 86,510 95,158 119,385
Transmission for others 10,295 10,240 9,390 9,506 7,979
Miscellaneous services 24,264 26,566 15,224 14,440 25,019
-------------------------------------------------------------------
Electric operating revenues 1,878,553 1,718,272 1,614,952 1,616,860 1,581,039
Retail rate refund reversal - - - 9,308 21,374
-------------------------------------------------------------------
Net electric operating revenues $ 1,878,553 $ 1,718,272 $ 1,614,952 $ 1,626,168 $ 1,602,413
===================================================================
ELECTRIC SALES (MWh)
Residential 7,970,309 7,541,440 6,848,905 6,873,300 6,247,002
Commercial 8,524,882 8,233,762 7,768,289 7,456,049 7,040,026
Industrial 3,123,283 3,039,357 2,933,459 2,926,318 2,890,859
Irrigation 112,363 121,775 119,580 132,340 111,902
Other 86,090 84,362 78,478 76,827 75,175
-------------------------------------------------------------------
Total retail 19,816,927 19,020,696 17,748,711 17,464,834 16,364,964
Sales for resale 9,233,573 3,367,234 2,720,704 2,764,223 3,685,736
-------------------------------------------------------------------
Total electric sales 29,050,500 22,387,930 20,469,415 20,229,057 20,050,700
===================================================================
ELECTRIC CUSTOMERS - END OF YEAR
Residential 680,478 654,602 625,352 603,989 578,718
Commercial 81,246 78,178 75,105 72,740 70,516
Industrial 3,192 3,055 2,913 2,976 3,061
Irrigation 764 841 837 897 880
Other 851 828 786 762 764
-------------------------------------------------------------------
Total retail 766,531 737,504 704,993 681,364 653,939
Sales for resale 50 48 39 44 40
-------------------------------------------------------------------
Total electric customers 766,581 737,552 705,032 681,408 653,979
===================================================================
</TABLE>
See Financial Review on pages 24-27 for a discussion of certain information in
the foregoing table.
QUARTERLY STOCK PRICES AND DIVIDENDS
Stock Symbol: PNW
<TABLE>
<CAPTION>
Dividends Dividends
Per Per
1997 HIGH LOW CLOSE SHARE(a) 1996 HIGH LOW CLOSE SHARE(b)
- ---------------------------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 32 7/8 30 1/8 30 1/8 $ 0.275 1st Quarter 30 1/4 26 1/4 28 7/8 $ 0.250
2nd Quarter 30 3/4 27 5/8 30 1/16 $ 0.550 2nd Quarter 30 3/8 26 1/4 30 3/8 $ 0.500
3rd Quarter 34 7/8 29 13/16 33 5/8 $ - 3rd Quarter 30 28 29 5/8 $ 0.275
4th Quarter 42 3/4 33 3/16 42 3/8 $ 0.300 4th Quarter 32 1/4 29 1/2 31 3/4 $ -
</TABLE>
(a) Dividends for the 3rd quarter of 1997 were declared in June.
(b) Dividends for the 3rd and 4th quarters of 1996 were declared in June and
September, respectively.
23
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following discussion relates to Pinnacle West and its subsidiaries: APS,
SunCor and El Dorado. The discussion also relates to the discontinued operations
of MeraBank, A Federal Savings Bank. References to "Notes" refer to Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
1997 Compared with 1996
Pinnacle West reported net income of $235.9 million in 1997 compared with $181.2
million in 1996. The following is a summary:
(Thousands of Dollars) 1997 1996
- --------------------------------------------------------------
Income from continuing
operations $ 235,856 $ 211,059
Loss from discontinued
operations -
net of income tax - (9,539)
Extraordinary charge for early
retirement of debt - net of
income tax - (20,340)
--------- ---------
Net income $ 235,856 $ 181,180
========= =========
Earnings from continuing operations increased by $24.8 million (11.7%) primarily
because of increased earnings at the subsidiaries and lower financing costs at
the parent company resulting from debt reduction and lower interest rates. The
1996 loss from discontinued operations related to remnants of MeraBank legal
matters.
APS' 1997 earnings increased $12.3 million (5.4%) over 1996 earnings primarily
because of customer growth; a $32 million pretax charge in 1996 for a voluntary
severance program; two fuel-related settlements; and lower financing costs.
These positive factors more than offset the effects of APS' 1996 regulatory
agreement with the Arizona Corporation Commission (ACC), which during 1997
resulted in approximately $60 million of additional regulatory asset
amortization and a $35 million revenue decrease caused by two retail price
reductions. See Note 3 and "Results of Operations - Regulatory Agreements" below
for additional information about the 1996 regulatory agreement. In 1996, APS
also recognized $12 million of income tax benefits, which were not repeated in
1997.
Electric operating revenues increased $160 million primarily because of
increases in sales for resale ($128 million); customer growth ($58 million); and
weather effects ($7 million). As mentioned in the preceding paragraph, these
positive factors were partially offset by a $35 million revenue decrease caused
by retail price reductions. Sales for resale are wholesale electricity sales to
third parties who resell the electricity to their customers. The increase in
sales for resale was a result of increased activity in competitive bulk power
markets. The increase in sales for resale did not significantly affect earnings
because it was substantially offset by higher power purchases.
The two fuel-related settlements increased 1997 pretax earnings by approximately
$21 million. These settlements are reflected in the Consolidated Statement of
Income as reductions in fuel expense and as other income. Approximately $16
million of the settlements related to years prior to 1997 and $5 million related
to 1997. For at least the next several years, the total annual savings from the
settlements are expected to be about $10 million before income taxes. APS does
not have a fuel adjustment clause as part of its retail rate structure. As a
result, changes in fuel and purchased power expenses are reflected in current
earnings.
Operations and maintenance expenses were lower in 1997 because of the charge for
the voluntary severance program recorded in 1996 and related savings in 1997.
These savings were partially offset by increased expenses for marketing,
information technology and power plant maintenance.
APS' financing costs decreased $12 million during 1997 because of lower amounts
of outstanding debt and preferred stock.
SunCor reported net income of $5.3 million in 1997 compared with $4.2 million in
1996.
El Dorado reported net income of $8.2 million in 1997 compared with $0.4 million
in 1996 as a result of investment sales in 1997.
1996 Compared with 1995
The Company reported net income of $181.2 million in 1996 compared with $188.0
million in 1995. The following is a summary:
(Thousands of Dollars) 1996 1995
- ------------------------------------------------------------------
Income from continuing
operations $ 211,059 $ 199,608
Loss from discontinued
operations -
net of income tax (9,539) -
Extraordinary charge for early
retirement of debt - net of
income tax (20,340) (11,571)
--------- ---------
Net income $ 181,180 $ 188,037
========= =========
Excluding the effects of the discontinued operations and extraordinary items,
the Company's 1996 earnings increased $11.5 million (5.7%) over 1995 earnings.
This increase reflects increased earnings at APS and lower financing costs at
the parent company due to continued debt reduction and lower interest rates.
APS' 1996 earnings increased $5.9 million (2.7%) over 1995 earnings primarily
because of customer growth and higher residential usage; weather effects; tax
and interest savings; and a $21 million pretax write-down of certain assets in
1995. These positive factors more than offset the effects of APS' 1996
regulatory agreement with the ACC, which during 1996 resulted in $60 million of
additional regulatory asset amortization and a
24
<PAGE>
$30 million revenue decrease caused by a retail price reduction. See Note 3 and
"Results of Operations - Regulatory Agreements" below for additional information
about the 1996 regulatory agreement.
Other important factors that made the comparison of APS' 1996 earnings with 1995
earnings less favorable were a $32 million pretax charge for a voluntary
severance program; the recognition in 1995 of a $5 million after-tax gain on the
sale of a small subsidiary; and increased fuel expenses of $56 million primarily
because of increased retail and wholesale sales, higher natural gas costs and
higher coal prices.
Electric operating revenues increased $103 million primarily because of retail
customer growth and higher residential usage ($75 million); weather effects ($40
million); increases in sales for resale ($9 million); and other ($9 million). As
mentioned above, these positive factors were partially offset by a $30 million
revenue decrease caused by a retail price reduction.
Taxes other than income taxes decreased $21 million primarily because of a
change in property tax law. Income tax expense was lower because of APS'
recognition of $12 million of income tax benefits associated with capital loss
carryforwards.
APS' financing costs decreased $12 million during 1996 because of lower average
interest rates and lower amounts of outstanding debt and preferred stock.
SunCor reported net income of $4.2 million in 1996 compared with $4.1 million in
1995. Increased real estate revenues and operating expenses were the result of
the acquisition of Golden Heritage Homes in 1996.
El Dorado reported net income of $0.4 million in 1996 compared with $8.5 million
in 1995. The decrease reflects investment sales in 1995.
Regulatory Agreements
APS' results of operations are affected, and will be affected, by the impacts of
existing regulatory agreements between APS and the ACC.
As part of the 1996 regulatory agreement with the ACC, APS is recovering
substantially all of its present regulatory assets through accelerated
amortization over an eight-year period that began July 1, 1996. See Note 3. This
accelerated amortization increases annual amortization expense by approximately
$120 million ($72 million after taxes).
Also as part of the 1996 regulatory agreement, APS agreed to decrease retail
prices effective July 1, 1996 by approximately $48.5 million annually ($29
million after income taxes), or 3.4%. In addition, APS agreed to share future
cost savings with its customers through potential additional retail price
reductions. Pursuant to the agreed-upon price reduction formula, on July 1,
1997, APS reduced its retail prices by approximately $17.6 million annually
($10.5 million after income taxes), or 1.2%. Additionally, in March 1998, APS
filed with the ACC its calculation of an additional retail price decrease of
approximately $17 million annually ($10 million after income taxes), or 1%, to
become effective July 1, 1998. The amount and timing of the price decrease are
subject to ACC approval.
The factors that offset the earnings impact of the accelerated regulatory asset
amortization and the 1997 and 1996 price decreases are discussed above in
"Results of Operations."
As part of a 1994 settlement with the ACC, APS accelerated amortization of
substantially all deferred investment tax credits (ITCs) over a five-year period
that ends on December 31, 1999. The amortization of ITCs decreases annual
consolidated income tax expense by approximately $24 million. See Note 4.
CAPITAL NEEDS AND RESOURCES
Parent Company
The parent company reduced its debt as follows: 1997, $45 million; 1996, $60
million; and 1995, $119 million. The parent company has a $250 million line of
credit, under which borrowings of $155 million were outstanding at December 31,
1997. The parent company does not have any debt repayment obligations until
2001.
During the past three years, the parent company's primary cash needs were for
common stock dividends, interest payments and optional and mandatory repayment
of principal on its long-term debt. See Note 6. As provided in the 1996
regulatory agreement (see Note 3), the parent company invested $50 million in
APS in 1997 and 1996 and will invest similar amounts annually in 1998 and 1999.
During 1997, the Company repurchased $80 million of common stock, resulting in a
reduction of 2.7 million shares outstanding at year-end.
Dividends from APS have been Pinnacle West's primary source of cash. SunCor
provided cash to the parent in 1997, 1996 and 1995. El Dorado provided cash to
the parent in 1997 and 1995. Both are expected to contribute to Pinnacle West's
cash flow in 1998. Tax allocation payments to the parent company from
subsidiaries, in excess of payments made by the parent company to taxing
authorities, were an additional source of cash in 1997, 1996 and 1995, and are
expected to provide additional cash in 1998.
APS
APS' capital requirements consist primarily of capital expenditures and optional
and mandatory redemptions of long-term debt and preferred stock. APS funds its
capital requirements from cash provided by operations, annual equity infusions
from its parent company of $50 million from 1996 through 1999 (see Note 3), and,
to the extent necessary, external financing. During the period 1995 through
1997, APS funded all of its capital expenditures from cash provided by
operations and expects to do so in 1998 through 2000 as well.
During 1997, APS redeemed approximately $240 million of long-term debt and $47
million of preferred stock, including premiums, with cash from operations and
long- and short-term debt.
25
<PAGE>
APS' projected capital expenditures for the next three years are: 1998, $323
million; 1999, $313 million; and 2000, $306 million. These amounts include about
$30 - $35 million each year for nuclear fuel. In general, most of the projected
capital expenditures are for expanding transmission and distribution
capabilities to meet customer growth, for upgrading existing facilities and for
environmental purposes. In addition, APS is considering expanding certain of its
businesses over the next several years, which may result in increased
expenditures. APS' construction plans through the year 2007 do not include any
major baseload generating plants.
APS' long-term debt and preferred stock redemption requirements and payment
obligations on a capitalized lease for the next three years are: 1998, $114
million; 1999, $174 million; and 2000, $114 million. Based on cash provided by
operations and APS' capital requirements, APS may make optional redemptions of
long-term debt and preferred stock from time to time.
As of December 31, 1997, APS had credit commitments from various banks totaling
approximately $400 million, which were available either to support the issuance
of commercial paper or to be used as bank borrowings. At the end of 1997, there
were $130.8 million of commercial paper and $150 million of bank borrowings
outstanding.
During 1997, APS incurred $60 million of long-term debt under credit agreements
and issued $50 million of its senior notes. Until APS has repaid all of its
first mortgage bonds (other than those that secure senior notes), the senior
notes are secured by first mortgage bonds that have the same interest rate,
interest payment dates, maturity and redemption provisions as the senior notes.
See Note 6 for additional information regarding the senior notes. In January
1998, APS issued $100 million of unsecured debt.
Although provisions in APS' first mortgage bond indenture, articles of
incorporation and ACC financing orders establish maximum amounts of additional
first mortgage bonds and preferred stock that APS may issue, management does not
expect any of these provisions to limit APS' ability to meet its capital
requirements.
Non-Utility Subsidiaries
During the past three years, SunCor and El Dorado each funded all of their cash
requirements through cash flow from operations and their own financings.
SunCor's capital needs consist primarily of capital expenditures for land
development and home construction, which, on the basis of projects now under
development, are expected to be: 1998, $45 million; 1999, $58 million; and 2000,
$51 million. Capital resources available to meet these requirements include
funds provided by operations and SunCor's own external financings.
As of December 31, 1997, SunCor had a $55 million line of credit, under which
$40.6 million of borrowing was outstanding. SunCor's debt repayment requirements
as of December 31, 1997 were as follows: 1998, $4.6 million; 1999, $28.6
million; and 2000, $54.1 million.
COMPETITION AND INDUSTRY RESTRUCTURING
The electric industry is undergoing significant change to a competitive,
market-based structure from a highly-regulated, cost-based environment in which
companies have been entitled to recover their costs and earn fair returns on
their invested capital in exchange for commitments to serve all customers within
designated service territories. In December 1996, the ACC adopted rules that
provide a framework for the introduction of retail electric competition in
Arizona in phases from 1999 to 2003. See Note 3 for additional information about
these rules and other competitive developments.
The ACC ordered in the rules that numerous issues require additional
consideration prior to the implementation of retail electric competition in
Arizona. During 1997, the ACC held workshops to gather input from various
constituencies with respect to those issues.
The rules indicate that the ACC will allow recovery of unmitigated stranded
costs, but do not set forth the mechanisms for determining and recovering such
costs. In February 1998, the ACC completed a formal, generic hearing on stranded
cost determination and recovery. Based on various assumptions, estimates and
methodologies, APS currently estimates that its stranded costs to be recovered
(excluding regulatory assets which have already been addressed by the ACC) will
be less than $500 million. APS is seeking full recovery of stranded costs during
a transition period proposed to go through 2006. Decisions by the ACC have not
yet been made with respect to this issue.
An Arizona joint legislative committee studied electric utility restructuring
issues in 1996 and 1997. In February 1998, a bill was introduced in the Arizona
legislature to facilitate implementation of retail electric competition in the
state. The bill has progressed through several stages to date. Additionally,
legislation related to electric competition has been proposed in the United
States Congress. See Note 3 for a discussion of legislative developments.
The Company believes that further ACC decisions, legislation at the Arizona and
federal levels and perhaps amendments to the Arizona Constitution will
ultimately be required before significant implementation of retail electric
competition can lawfully occur in Arizona. Until it has been determined how
competition will be implemented in Arizona, including the manner in which
stranded costs will be addressed, the Company cannot accurately predict the
impact of full retail competition on its financial position, cash flows or
results of operations. As competition in the electric industry continues to
evolve, the Company will continue to evaluate strategies and alternatives that
will position the Company to compete effectively in a restructured industry.
APS 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.
26
<PAGE>
APS' existing regulatory orders and current regulatory environment support its
accounting practices related to regulatory assets, which amounted to
approximately $1.0 billion at December 31, 1997. In accordance with the 1996
regulatory agreement, the ACC accelerated the amortization of substantially all
of APS' regulatory assets to an eight-year period that began July 1, 1996. If
APS ceases to be cost-based regulated, it 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. See Note 1 for
additional information on regulatory accounting.
YEAR 2000 TECHNOLOGY ISSUES
The Company has made, and will continue to make, certain modifications to its
computer hardware and software systems and applications to ensure they are
capable of handling dates in the year 2000 and thereafter. The Company's major
computer systems have been updated and other systems are being analyzed for
potential modifications. The financial impact on the Company is not anticipated
to be material to its financial position, cash flows or results of operations.
The Company is in the process of formal communications with its significant
suppliers, business partners and large customers to determine the extent to
which it may be affected by these third parties' plans to remediate their own
year 2000 issues in a timely manner.
ACCOUNTING MATTERS
Note 2 describes three new accounting standards related to comprehensive income,
segment disclosures and disclosures about pensions and other postretirement
benefits, which are effective in 1998. These standards are not expected to have
a material effect on the Company's financial position, cash flows or results of
operations. Also, see Note 13 for a description of a proposed standard on
accounting for certain liabilities related to closure or removal of long-lived
assets.
RISK MANAGEMENT
The Company's operations include managing market risks related to changes in
interest rates, commodity prices and investments held by the nuclear
decommissioning trust fund.
Interest Rate and Equity Risk
The Company's major financial market risk exposure is changing interest rates.
Changing interest rates will affect interest paid on variable rate debt and
interest earned by the nuclear decommissioning trust fund. The Company's policy
is to manage interest rates through the use of a combination of fixed and
floating rate debt. The nuclear decommissioning fund also has risks associated
with changing market values of equity investments. Nuclear decommissioning costs
are recovered in rates.
The table below presents contractual balances of the Company's long-term and
short-term debt at the expected maturity dates as well as the fair value of
those instruments on December 31, 1997. The weighted average interest rates for
the various debt presented are actual as of December 31, 1997.
Expected Maturity/Principal Repayment
December 31, Variable Fixed
(Thousands of Dollars) Short-Term Long-Term Long-Term
- --------------------------------------------------------------------------------
Weighted Average
Rates 6.27% 5.06% 7.66%
1998 $ 130,750 $ 3,064 $ 105,631
1999 - 28,598 164,378
2000 - 54,133 104,711
2001 - 155,079 27,488
2002 - 150,088 125,000
Years thereafter - 443,178 998,628
-------------------------------------------
Total $ 130,750 $ 834,140 $ 1,525,836
===========================================
Fair Value $ 130,750 $ 834,140 $ 1,556,697
===========================================
Commodity Price Risk
The Company enters into forwards, futures and other similar contracts to hedge
the price risks associated with a portion of anticipated future electricity
production and gas purchases. Most of these agreements are settled in physical
delivery, with the balance settled in cash at or prior to expiration. Under
certain of these agreements, payments are sometimes made or received based on
the differential between a fixed and a variable product price. The Company does
not obtain collateral to support the agreements, but monitors the financial
viability of counterparties and believes it has minimized its credit risk on
these transactions. In the event of nonperformance by counterparties, the
Company would be exposed to price risk. The Company may recognize an accounting
gain or loss where actual delivery occurs and the price in the contract may
differ from the prevailing price at the delivery point in completing the
transaction. The Company defers the impact of changes in the market value of
contracts that serve as hedges until the related transaction is completed.
FORWARD-LOOKING STATEMENTS
The above discussion contains forward-looking statements that involve risks and
uncertainties. Words such as "estimates," "expects," "anticipates," "plans,"
"believes," "projects," and similar expressions identify forward-looking
statements. These risks and uncertainties include, but are not limited to, the
ongoing restructuring of the electric industry; the outcome of the regulatory
proceedings relating to the restructuring; regulatory, tax and environmental
legislation; the ability of APS to successfully compete outside its traditional
regulated markets; regional economic conditions, which could affect customer
growth; the cost of debt and equity capital; weather variations affecting
customer usage; technological developments in the electric industry; and the
strength of the real estate market.
These factors and the other matters discussed above may cause future results to
differ materially from historical results, or from results or outcomes currently
expected or sought by the Company.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Management.......................................................................................... 29
Independent Auditors' Report.................................................................................. 30
Consolidated Statements of Income for each of the three years in the period ended December 31, 1997........... 31
Consolidated Balance Sheets --- December 31, 1997 and 1996.................................................... 32
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997....... 34
Consolidated Statements of Retained Earnings for each of the three years in the period ended
December 31, 1997........................................................................................ 35
Notes to Consolidated Financial Statements.................................................................... 35
Financial Statement Schedule for each of the three years in the period ended December 31, 1997
Schedule II - Valuation and Qualifying
Accounts for three years ended December 31,
1997, 1996 and 1995................................................................ 48
</TABLE>
See Note 14 of Notes to Financial Statements for the selected quarterly
financial data required to be presented in this Item.
28
<PAGE>
REPORT OF MANAGEMENT
The primary responsibility for the integrity of the Company's financial
information rests with management, which has prepared the accompanying financial
statements and related information. Such information was prepared in accordance
with generally accepted accounting principles appropriate in the circumstances,
based on management's best estimates and judgments and giving due consideration
to materiality. These financial statements have been audited by independent
auditors and their report is included.
Management maintains and relies upon systems of internal accounting controls. A
limiting factor in all systems of internal accounting control is that the cost
of the system should not exceed the benefits to be derived. Management believes
that the Company's system provides the appropriate balance between such costs
and benefits.
Periodically the internal accounting control system is reviewed by both the
Company's internal auditors and its independent auditors to test for compliance.
Reports issued by the internal auditors are released to management, and such
reports or summaries thereof are transmitted to the Audit Review Committee of
the Board of Directors and the independent auditors on a timely basis.
The Audit Review Committee, composed solely of outside directors, meets
periodically with the internal auditors and independent auditors (as well as
management) to review the work of each. The internal auditors and independent
auditors have free access to the Audit Review Committee, without management
present, to discuss the results of their audit work.
Management believes that the Company's systems, policies and procedures provide
reasonable assurance that operations are conducted in conformity with the law
and with management's commitment to a high standard of business conduct.
Richard Snell George A. Schreiber, Jr.
Chairman & Executive Vice President &
Chief Executive Officer Chief Financial Officer
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Pinnacle West
Capital Corporation and its subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of income, retained earnings and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Pinnacle West Capital
Corporation and its subsidiaries at December 31, 1997 and 1996 and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Phoenix, Arizona
March 4, 1998
30
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(Dollars in Thousands except Per Share Amount)
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
OPERATING REVENUES
<S> <C> <C> <C>
Electric $ 1,878,553 $ 1,718,272 $ 1,614,952
Real estate 116,473 99,488 54,846
-----------------------------------------
Total 1,995,026 1,817,760 1,669,798
-----------------------------------------
FUEL EXPENSES
Fuel for electric generation 201,341 230,393 208,928
Purchased power 235,286 95,130 60,870
-----------------------------------------
Total 436,627 325,523 269,798
-----------------------------------------
OPERATING EXPENSES
Utility operations and maintenance 399,434 430,714 400,814
Real estate operations 111,628 96,080 50,344
Depreciation and amortization (Note 1) 368,285 299,507 243,989
Taxes other than income taxes 121,546 122,077 142,429
-----------------------------------------
Total 1,000,893 948,378 837,576
-----------------------------------------
OPERATING INCOME 557,506 543,859 562,424
-----------------------------------------
OTHER INCOME (DEDUCTIONS)
Allowance for equity funds used during
construction - 5,209 4,982
Interest on long-term debt (160,670) (171,458) (209,293)
Other interest (18,673) (23,764) (16,975)
Capitalized interest 16,208 9,509 9,065
Preferred stock dividend requirements
of APS (12,803) (17,092) (19,134)
Other - net 4,569 (6,748) (3,496)
-----------------------------------------
Total (171,369) (204,344) (234,851)
-----------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 386,137 339,515 327,573
INCOME TAX EXPENSE (NOTE 4) 150,281 128,456 127,965
-----------------------------------------
INCOME FROM CONTINUING OPERATIONS 235,856 211,059 199,608
Loss from discontinued operations -
net of income tax of $6,461 - (9,539) -
Extraordinary charge for early retirement
of debt - net of income tax of
$13,777 and $7,834 - (20,340) (11,571)
-----------------------------------------
NET INCOME $ 235,856 $ 181,180 $ 188,037
=========================================
AVERAGE COMMON SHARES
OUTSTANDING 85,502,909 87,441,515 87,419,300
EARNINGS PER AVERAGE COMMON
SHARE OUTSTANDING
Continuing operations - basic $ 2.76 $ 2.41 $ 2.28
Net income - basic 2.76 2.07 2.15
Continuing operations - diluted 2.74 2.40 2.27
Net income - diluted 2.74 2.06 2.14
DIVIDENDS DECLARED PER SHARE $ 1.125 $ 1.025 $ 0.925
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(Thousands of Dollars) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 27,484 $ 26,686
Customer and other receivables - net 183,507 169,237
Accrued utility revenues (Note 1) 58,559 55,470
Materials and supplies (at average cost) 70,634 74,120
Fossil fuel (at average cost) 9,621 13,928
Deferred income taxes (Note 4) 57,887 69,688
Other current assets 41,408 41,140
--------------------------
Total current assets 449,100 450,269
--------------------------
INVESTMENTS AND OTHER ASSETS
Real estate investments - net (Note 6) 365,921 398,527
Other assets (Note 13) 215,027 173,109
--------------------------
Total investments and other assets 580,948 571,636
--------------------------
UTILITY PLANT (NOTES 6, 10 AND 11)
Electric plant in service and held for future use 7,009,059 6,803,211
Less accumulated depreciation and amortization 2,620,607 2,426,143
--------------------------
Total 4,388,452 4,377,068
Construction work in progress 237,492 226,935
Nuclear fuel, net of amortization of $66,081 and $63,892 51,624 51,137
--------------------------
Net utility plant 4,677,568 4,655,140
--------------------------
DEFERRED DEBITS
Regulatory asset for income taxes (Note 4) 458,369 516,722
Rate synchronization cost deferral (Note 1) 358,871 414,082
Other deferred debits 325,561 381,440
--------------------------
Total deferred debits 1,142,801 1,312,244
--------------------------
TOTAL ASSETS $6,850,417 $6,989,289
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE>
<TABLE>
<CAPTION>
December 31,
(Thousands of Dollars) 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable $ 117,429 $ 184,095
Accrued taxes 84,610 82,413
Accrued interest 32,974 39,652
Short-term borrowings (Note 5) 130,750 16,900
Current maturities of long-term debt (Note 6) 108,695 156,277
Customer deposits 30,672 34,222
Other current liabilities 18,534 37,056
--------------------------
Total current liabilities 523,664 550,615
--------------------------
LONG-TERM DEBT LESS CURRENT MATURITIES (NOTE 6) 2,244,248 2,372,113
--------------------------
DEFERRED CREDITS AND OTHER
Deferred income taxes (Note 4) 1,363,461 1,359,312
Deferred investment tax credit (Note 4) 50,861 74,379
Unamortized gain - sale of utility plant 82,363 86,939
Other 387,223 356,935
--------------------------
Total deferred credits and other 1,883,908 1,877,565
--------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
MINORITY INTERESTS (NOTE 7)
Non-redeemable preferred stock of APS 142,051 165,673
--------------------------
Redeemable preferred stock of APS 29,110 53,000
--------------------------
COMMON STOCK EQUITY (NOTE 8)
Common stock, no par value; authorized 150,000,000 shares;
issued and outstanding 84,824,947 at end of 1997 and
87,515,847 at end of 1996 1,553,771 1,636,354
Retained earnings 473,665 333,969
--------------------------
Total common stock equity 2,027,436 1,970,323
--------------------------
TOTAL LIABILITIES AND EQUITY $6,850,417 $6,989,289
==========================
</TABLE>
33
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
(Thousands of Dollars) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
(NOTE 1)
Income from continuing operations $ 235,856 $ 211,059 $ 199,608
Items not requiring cash
Depreciation and amortization 401,813 334,808 276,288
Deferred income taxes - net 24,809 13,392 61,076
Allowance for equity funds used
during construction -- (5,209) (4,982)
Deferred investment tax credit (23,518) (23,518) (23,529)
Other - net (4,680) (365) 16,099
Changes in current assets and liabilities
Customer and other receivables - net (14,270) (38,106) 4,653
Accrued utility revenues (3,089) (1,951) 1,913
Materials, supplies and fossil fuel 7,793 11,945 25,606
Other current assets (109) (8,949) (4,249)
Accounts payable (54,882) 65,586 (2,093)
Accrued taxes 2,197 (7,088) 6,818
Accrued interest (6,678) (9,306) (7,100)
Other current liabilities (23,087) 1,515 3,714
Decrease (increase) in land held 29,515 16,547 (4,660)
Other - net 65,909 12,176 6,700
-----------------------------------
Net Cash Flow Provided By Operating Activities 637,579 572,536 555,862
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (307,876) (258,598) (295,772)
Capitalized interest (16,208) (9,509) (9,065)
Other - net (20,779) (15,945) 422
-----------------------------------
Net Cash Flow Used For Investing Activities (344,863) (284,052) (304,415)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 146,013 557,067 225,128
Short-term borrowings - net 113,850 (160,900) 46,300
Dividends paid on common stock (96,160) (89,614) (80,855)
Repurchase and retirement of common stock (79,997) -- --
Repayment of long-term debt (325,526) (575,332) (383,117)
Redemption of preferred stock (47,201) (50,360) --
Extraordinary charge for early retirement of debt -- (20,340) (11,571)
Other - net (2,897) (1,858) (2,512)
-----------------------------------
Net Cash Flow Used For Financing Activities (291,918) (341,337) (206,627)
-----------------------------------
Net Cash Flow 798 (52,853) 44,820
Cash and Cash Equivalents at Beginning of Year 26,686 79,539 34,719
-----------------------------------
Cash and Cash Equivalents at End of Year $ 27,484 $ 26,686 $ 79,539
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
(Thousands of Dollars) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Retained Earnings at Beginning of Year $ 333,969 $ 242,403 $ 135,221
Net Income 235,856 181,180 188,037
Common Stock Dividends (96,160) (89,614) (80,855)
-----------------------------------
Retained Earnings at End of Year $ 473,665 $ 333,969 $ 242,403
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidation and Nature of Operations
The consolidated financial statements include the accounts of Pinnacle West and
its subsidiaries: APS, SunCor and El Dorado.
APS, the Company's major subsidiary and Arizona's largest electric utility, with
767,000 customers, provides wholesale or retail electric service to the entire
state with the exception of Tucson and about one-half of the Phoenix area.
SunCor is a developer of residential, commercial and industrial projects on some
13,400 acres, predominantly in the metropolitan Phoenix area. El Dorado is a
venture capital firm with a diversified portfolio.
Accounting Records
Accounting records are maintained in accordance with generally accepted
accounting principles (GAAP). The preparation of financial statements in
accordance with GAAP requires the use of estimates by management. Actual results
could differ from those estimates.
Regulatory Accounting
APS 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.
APS' major regulatory assets are deferred income taxes (see Note 4) and rate
synchronization cost deferrals (see "Rate Synchronization Cost Deferrals" in
this note). These items, combined with miscellaneous regulatory assets and
liabilities, amounted to approximately $1.0 billion and $1.1 billion at December
31, 1997 and 1996, respectively, most of which are included in "Deferred Debits"
on the Consolidated Balance Sheets. In accordance with the 1996 regulatory
agreement (see Note 3), the Arizona Corporation Commission (ACC) accelerated the
amortization of substantially all of APS' regulatory assets to an eight-year
period that began July 1, 1996. The accelerated portion of the regulatory asset
amortization, approximately $120 million pretax in 1997 and $60 million pretax
in 1996, is included in depreciation and amortization expense on the
Consolidated Statements of Income.
During 1997, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) issued EITF 97-4, which requires that SFAS No. 71 be
discontinued no later than when legislation is passed or a rate order is issued
that contains sufficient detail to determine its effect on the portion of the
business being deregulated, which could result in write-downs or write-offs of
physical and/or regulatory assets. Additionally, the EITF determined that
regulatory assets should not be written off if they are to be recovered from a
portion of the entity which continues to apply SFAS No. 71.
Although the ACC has issued rules for transitioning generation services to
competition, there are many unresolved issues. APS continues to apply SFAS No.
71 to all of its operations. If rate recovery of regulatory assets is no longer
probable, whether due to competition or regulatory action, APS would be required
to write off the remaining balance as an extraordinary charge to expense.
Utility Plant and Depreciation
Utility plant represents the buildings, equipment and other facilities used to
provide electric service. The cost of utility plant includes labor, materials,
contract services, other related items and capitalized interest or an allowance
for funds used during construction. The cost of retired depreciable utility
plant, plus removal costs less salvage realized, is charged to accumulated
depreciation. See Note 13 for information on a proposed accounting standard
which impacts accounting for removal costs.
Depreciation on utility property is recorded on a straight-line basis. The
applicable rates as prescribed by regulators for 1995 through 1997 ranged from
1.51% to 20%, which resulted in an annual composite rate of 3.35% for 1997.
Depreciation and amortization of non-utility property and equipment are provided
over the estimated useful lives of the related assets, ranging from 3 to 50
years.
Capitalized Interest
In 1997, APS began capitalizing interest in accordance with SFAS No. 34,
"Capitalization of Interest Cost." Capitalized interest represents the cost of
debt funds used to finance construction of utility plant. Plant construction
costs, including capitalized interest, are recovered in authorized rates through
depreciation when completed projects are placed into commercial operation.
Capitalized interest does not represent current cash earnings. The rate used to
calculate capitalized interest for 1997 was 7.25%.
35
<PAGE>
Prior to 1997, APS accrued an allowance for funds used during construction
(AFUDC). AFUDC represented the cost of debt and equity funds used to finance
construction of utility plant, and did not represent current cash earnings.
AFUDC was calculated using composite rates of 7.75% for 1996 and 8.52% for 1995.
Revenues
Electric operating revenues are recognized on the accrual basis and include
estimated amounts for service rendered but unbilled at the end of each
accounting period.
Rate Synchronization Cost Deferrals
As authorized by the ACC, operating costs (excluding fuel) and financing costs
of Palo Verde Units 2 and 3 were deferred from the commercial operation dates
(September 1986 and January 1988, respectively) until the dates the units were
included in a rate order (April 1988 and December 1991, respectively). Beginning
July 1, 1996, the deferrals are being amortized over an eight-year period in
accordance with the 1996 regulatory agreement (see Note 3). Prior to July 1,
1996, the deferrals were amortized over thirty-five year periods. Amortization
of the deferrals is included in depreciation and amortization expense on the
Consolidated Statements of Income.
Nuclear Fuel
Nuclear fuel is charged to fuel expense using the unit-of-production method
under which the number of units of thermal energy produced in the current period
is related to the total thermal units expected to be produced over the remaining
life of the fuel.
Under federal law, the United States Department of Energy (DOE) is responsible
for the permanent disposal of spent nuclear fuel, and assesses $0.001 per kWh of
nuclear generation. This amount is charged to nuclear fuel expense. See Note 12
for information on spent fuel disposal and Note 13 for information on nuclear
decommissioning costs.
Income Taxes
The Company files a consolidated U.S. income tax return. In accordance with an
intercompany tax allocation agreement, provisions for income taxes are made by
each subsidiary as if separate income tax returns were filed. The difference, if
any, between these provisions and consolidated income tax expense is allocated
to the parent company.
Reacquired Debt Costs
APS amortizes gains and losses on reacquired debt over the remaining life of the
original debt, consistent with ratemaking. In accordance with the 1996
regulatory agreement (see Note 3), the ACC accelerated APS' amortization of the
regulatory asset for reacquired debt costs to an eight-year period that began
July 1, 1996. The accelerated portion of the regulatory asset amortization is
included in depreciation and amortization expense on the Consolidated Statements
of Income.
Statements of Cash Flows
Temporary cash investments and marketable securities are considered to be cash
equivalents for purposes of the Consolidated Statements of Cash Flows. During
1997, 1996 and 1995, the Company paid interest, net of amounts capitalized, of
$163.0 million, $185.9 million and $216.8 million, respectively. Income taxes
paid were $146.2 million, $121.0 million and $77.4 million, respectively; and
dividends paid on preferred stock of APS were $13.3 million, $17.4 million and
$19.1 million, respectively.
Reclassifications
Certain prior year amounts have been restated to conform to the 1997
presentation.
2. ACCOUNTING MATTERS
The Financial Accounting Standards Board has issued SFAS No. 130 "Reporting
Comprehensive Income," SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information" and SFAS No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits," all of which are effective in 1998.
SFAS No. 130 changes the reporting of certain items currently reported in the
common stock equity section of the balance sheet and is not expected to have a
material effect on the Company's financial statements.
SFAS No. 131 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.
SFAS No. 132 standardizes the disclosure requirements for pensions and other
postretirement benefits to provide information that is more comparable,
understandable and concise. It is not expected to have a material effect on the
Company's financial statement disclosures.
3. 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
framework rules include the following major provisions:
o The rules are intended to apply to virtually all of the Arizona electric
utilities regulated by the ACC, including APS.
o Each affected utility would be required to make available at least 20% of its
1995 system retail peak demand for competitive generation supply to all customer
classes not later than January 1, 1999; at least 50% not later than January 1,
2001; and all of its retail demand not later than January 1, 2003.
o Electric service providers that obtain Certificates of Convenience and
Necessity (CC&Ns) 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.
o On or before December 31, 1997, each affected utility was required to file
with the ACC proposed tariffs for bundled service, if different than current
tariffs, and unbundled service. Bundled service means electric service elements
(i.e., generation, transmission, distribution and ancillary services) provided
as a package to customers within an affected utility's current service area.
Unbundled service means electric service elements provided and priced
separately.
o 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
36
<PAGE>
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 its estimates of unmitigated stranded costs. The ACC would then, after
hearing and consideration of various factors, determine the magnitude of
stranded costs and appropriate stranded costs recovery mechanisms and charges.
The ACC ordered in the rules that numerous issues (including reliability;
stranded cost measurement and recovery; the phase-in process; bundled, unbundled
and metering services; legal issues; and independent system operator and spot
market development) require additional consideration prior to implementation of
retail electric competition. During 1997, the ACC conducted workshops to gather
input from various constituencies with respect to those issues.
In February 1998, the ACC completed a formal, generic hearing on stranded cost
determination and recovery. Based on various assumptions, estimates and
methodologies, APS currently estimates that its stranded costs to be recovered
(excluding regulatory assets which have already been addressed by the ACC) will
be less than $500 million. APS is seeking full recovery of stranded costs during
a transition period proposed to go through 2006. Decisions by the ACC have not
yet been made with respect to this issue.
An Arizona joint legislative committee studied electric utility industry
restructuring issues in 1996 and 1997. In conjunction with that study, Arizona
legislative counsel prepared memoranda in late 1997 related to the legal
authority of the ACC to deregulate the Arizona electric utility industry. The
memoranda raise a question as to the degree to which the ACC may, under the
Arizona Constitution, deregulate any portion of the electric utility industry
and allow rates to be determined by market forces.
In February 1998, a bill to facilitate implementation of retail electric
competition in the state was introduced in the Arizona legislature. The bill has
progressed through several stages to date. The bill includes the following major
provisions: (a) requirements that large government-operated electric utilities
(i) enter into intergovernmental agreements with the ACC to promote consistent
statewide practices; (ii) implement retail electric generation competition for
20% of each utility's 1995 retail peak demand by December 31, 1998 and for all
customers by December 31, 1999; (iii) decrease rates by at least 10% over a
ten-year period beginning as early as January 1, 1991; and (iv) recover
unmitigated stranded costs through a surcharge on distribution prices; and (b) a
proposal that the ACC adopt provisions for public service corporations
(including investor-owned utilities such as APS) consistent with some of the
bill's provisions for certain government-operated electric utilities as
described above.
The Company believes that certain provisions of the ACC framework rules are
deficient. In February 1997, a lawsuit was filed by APS to protect its legal
rights regarding those rules. That lawsuit is pending, but two related cases
filed by other utilities have been decided adversely to the utilities'
positions.
The Company believes that further ACC decisions, legislation at the Arizona and
federal levels and perhaps amendments to the Arizona Constitution (which
amendments would require a vote of the people) will ultimately be required
before significant implementation of retail electric competition can lawfully
occur in Arizona. Until the manner of implementation of competition, including
addressing stranded costs, is determined, the Company cannot accurately predict
the impact of full retail competition on its financial position, cash flows or
results of operation. As competition in the electric industry continues to
evolve, the Company will continue to evaluate strategies and alternatives that
will position the Company to compete in the new regulatory environment.
Federal
The Energy Policy Act of 1992 and recent rulemakings by Federal Energy
Regulatory Commission (FERC) have promoted increased competition in the
wholesale electric power markets. The Company does not expect these rules to
have a material impact on its financial statements.
Several electric utility reform bills have been introduced during the recent
congressional sessions, which as currently written, would allow consumers to
choose their electric 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.
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:
o An annual rate 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.
o Recovery of substantially all of APS' present regulatory assets through
accelerated amortization over an eight-year period that began July 1, 1996,
increasing annual amortization by approximately $120 million ($72 million after
income taxes). See Note 1.
o A formula for sharing future cost savings between customers and shareholders
(price reduction formula) referencing a return on equity (as defined) of 11.25%.
o 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.
o Infusion of $200 million of common equity into APS by the parent company, in
annual payments of $50 million starting in 1996.
Pursuant to the price reduction formula, in May 1997, the ACC approved a retail
price decrease of approximately $17.6 million ($10.5 million after income
taxes), or 1.2%, effective July 1, 1997. In March 1998, APS filed with the ACC
its calculation of an annual retail price reduction of approximately $17 million
($10 million after income taxes), or 1%, to become effective July 1, 1998. The
amount and timing of the price decrease are subject to ACC approval.
4. INCOME TAXES
Investment Tax Credit
Beginning in 1995, substantially all investment tax credits are being amortized
over a five-year period in accordance with a 1994 rate settlement agreement.
37
<PAGE>
Income Taxes
The Company follows the liability method of accounting for income taxes which
requires that deferred income taxes be recorded for all temporary differences
between the tax bases of assets and liabilities and the amounts recognized for
financial reporting. Deferred taxes are recorded using currently enacted tax
rates.
In accordance with SFAS No. 71, APS established a regulatory asset for certain
temporary differences, primarily AFUDC equity, to reflect the ratemaking
treatment. This regulatory asset is being amortized as the related differences
reverse. In accordance with the 1996 regulatory agreement (see Note 3), the ACC
accelerated APS' amortization of the regulatory asset for income taxes to an
eight-year period that began July 1, 1996. The accelerated portion of the
regulatory asset amortization is included in depreciation and amortization
expense on the Consolidated Statements of Income.
The components of income tax expense from continuing operations are as follows:
Year Ended December 31,
(Thousands of Dollars) 1997 1996 1995
- -------------------------------------------------------------
Current
Federal $ 105,818 $ 105,312 $ 77,869
State 43,172 35,052 1,081
-----------------------------------
Total current 148,990 140,364 78,950
Deferred 28,729 23,752 21,339
NOL and ITC
carryforward utilized - - 58,019
Change in
valuation allowance (3,920) (12,142) (6,814)
ITC amortization (23,518) (23,518) (23,529)
-----------------------------------
Total expense $ 150,281 $ 128,456 $ 127,965
===================================
Income tax expense differed from the amount computed by multiplying income from
continuing operations before income taxes by the statutory federal income tax
rate due to the following:
Year Ended December 31,
(Thousands of Dollars) 1997 1996 1995
- ----------------------------------------------------------------
Federal income tax
expense at statutory
rate, 35% $135,148 $118,830 $114,651
Increases (reductions)
in tax expense
resulting from:
Tax under book
depreciation 14,694 19,229 18,186
Preferred stock
dividends of APS 4,481 5,982 6,697
ITC amortization (23,518) (23,518) (23,529)
State income tax
net of federal
income tax benefit 24,497 19,565 19,245
Change in valuation
allowance (3,400) (10,525) (5,908)
Other (1,621) (1,107) (1,377)
---------------------------------
Income tax expense $150,281 $128,456 $127,965
=================================
The components of the net deferred income tax liability were as follows:
December 31,
(Thousands of Dollars) 1997 1996
- ---------------------------------------------------------------------
Deferred tax assets
Alternative minimum tax (can be
carried forward indefinitely) $ 53,601 $ 125,735
Deferred gain on Palo Verde
Unit 2 sale/leaseback 33,257 35,105
Other 91,701 97,060
Valuation allowance - (7,964)
------------------------
Total deferred tax assets 178,559 249,936
------------------------
Deferred tax liabilities
Plant-related 1,096,222 1,104,902
Regulatory asset for
income taxes 185,084 208,647
Rate synchronization deferrals 144,908 167,202
Other 57,919 58,809
------------------------
Total deferred tax liabilities 1,484,133 1,539,560
------------------------
Accumulated deferred
income taxes - net $1,305,574 $1,289,624
========================
5. LINES OF CREDIT
APS had committed lines of credit with various banks of $400 million at December
31, 1997 and 1996, which were available either to support the issuance of
commercial paper or to be used for bank borrowings. The commitment fees at
December 31, 1997 and 1996 for these lines of credit ranged from 0.07% to 0.15%
per annum. APS had long-term bank borrowings of $150 million and $100 million
outstanding at December 31, 1997 and 1996, respectively, under these lines of
credit.
APS had commercial paper borrowings outstanding of $130.8 million and $16.9
million at December 31, 1997 and 1996, respectively. The weighted average
interest rate on commercial paper borrowings was 6.27% and 6.40% on December 31,
1997 and 1996, respectively. By Arizona statute, APS' short-term borrowings
cannot exceed 7% of its total capitalization without the consent of the ACC.
The parent company had a revolving line of credit of $250 million and $225
million at December 31, 1997 and 1996, respectively. The commitment fees on this
line ranged from 0.10% to 0.125% in 1997 and 1996. Outstanding amounts under
this line at December 31, 1997 and 1996, were $155 million and $200 million,
respectively.
SunCor had revolving lines of credit totalling $55 million at December 31, 1997
and 1996. The commitment fees on these lines were 0.125% in 1997 and 1996.
SunCor had $40.6 million and $42.4 million outstanding under these lines at
December 31, 1997 and 1996, respectively.
38
<PAGE>
6. LONG-TERM DEBT
Borrowings under the APS mortgage bond indenture are secured by substantially
all utility plant; SunCor's debt is collaterized by interests in certain real
property; Pinnacle West's debt is unsecured. The following table presents the
components of consolidated long-term debt:
<TABLE>
<CAPTION>
December 31, Maturity Interest
(Thousands of Dollars) Dates (a) Rates 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
APS
First mortgage bonds 1997 7.125% $ - $ 150,000
1998 7.625% 100,000 100,000
1999 7.625% 100,000 100,000
2000 5.75% 100,000 100,000
2002 8.125% 125,000 125,000
2004 6.625% 85,000 100,000
2020 10.25% 109,550 114,550
2021 9.5% 45,140 50,810
2021 9% 72,370 72,500
2023 7.25% 97,150 100,000
2024 8.75% 121,918 148,500
2025 8% 88,500 116,900
2028 5.5% 25,000 25,000
2028 5.875% 154,000 154,000
Unamortized discount and premium (7,033) (8,412)
Pollution control indebtedness 2024-2031 Adjustable rate(b) 439,990 439,990
Collateralized loan 1999 6.125% 10,000 -
Senior notes (c) 2006 6.75% 100,000 100,000
Senior notes (c) 1999 6.72% 50,000 -
Debentures 2025 10% 75,000 75,000
Bank loans 2002 Adjustable rate(d) 150,000 100,000
Capitalized lease obligation (e) 1997-2001 7.48% 15,645 19,424
--------------------------
2,057,230 2,183,262
--------------------------
SunCor
Revolving credit 2000 (f) 40,600 42,432
Bank loan 2000 (g) 45,000 45,000
Notes payable 1997-2006 (h) 5,113 7,696
--------------------------
90,713 95,128
--------------------------
Pinnacle West
Revolving credit 2001 (i) 155,000 200,000
Senior notes 2001-2003 (j) 50,000 50,000
--------------------------
205,000 250,000
--------------------------
Total long-term debt 2,352,943 2,528,390
Less current maturities 108,695 156,277
--------------------------
Total long-term debt less
current maturities $2,244,248 $2,372,113
==========================
</TABLE>
(a) This schedule does not reflect the timing of redemptions which may occur
prior to maturity.
(b) The weighted-average rate for the years ended December 31, 1997 and 1996
was 3.62% and 3.40%, respectively. Changes in short-term interest rates
would affect the costs associated with this debt.
(c) APS has issued $150 million of first mortgage bonds ("senior note mortgage
bonds") to the senior note trustee as collateral for the senior notes. The
senior note mortgage bonds have the same interest rate, interest payment
dates, maturity, and redemption provisions as the senior notes. APS'
payments of principal, premium, and/or interest on the senior notes satisfy
the Company's corresponding payment obligations 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 senior notes, the senior note mortgage bonds
will no longer secure the senior notes and will cease to be outstanding.
(d) The weighted-average rate at December 31, 1997 and 1996 was 6.25% and
5.76%, respectively. Changes in short-term interest rates would affect the
costs associated with this debt.
(e) Represents the present value of future lease payments (discounted at an
interest rate of 7.48%) on a combined cycle plant sold and leased back from
the independent owner-trustee formed to own the facility (see Note 10).
(f) The weighted-average rate at December 31, 1997 and 1996 was 8.60% and
8.52%, respectively. Interest for 1997 and 1996 was based on LIBOR plus 2%
or prime plus 0.5%.
(g) The weighted-average rate at December 31, 1997 and 1996 was 8.44% and
7.62%, respectively. Interest for 1997 and 1996 was based on LIBOR plus 2%
or prime plus 0.5%.
(h) Multiple notes primarily with variable interest rates based mostly on the
lenders' prime.
(i) The weighted-average rate at December 31, 1997 and 1996 was 6.25% and
6.03%, respectively. Interest for 1997 was based on LIBOR plus 0.33%-0.4%
and for 1996 was LIBOR plus 0.4%.
(j) Includes two series of notes: $25 million at 6.62% due 2001, and $25
million at 6.87% due 2003.
Aggregate annual principal payments due on total long-term debt and for sinking
fund requirements through 2002 are as follows: 1998, $108.7 million; 1999,
$193.0 million; 2000, $158.8 million; 2001, $182.6 million; and 2002, $275.1
million. See Note 7 for redemption and sinking fund requirements of redeemable
preferred stock of APS.
39
<PAGE>
7. PREFERRED STOCK OF APS
Non-redeemable preferred stock is not redeemable except at the option of APS.
Redeemable preferred stock is redeemable through sinking fund obligations.
Preferred stock balances of APS are shown below:
<TABLE>
<CAPTION>
Number of Shares Outstanding Par Value Outstanding
December 31, December 31, Call
(Dollars in Thousands, Par Value Price Per
Except Per Share Amount) Authorized 1997 1996 Per Share 1997 1996 Share (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Redeemable:
$1.10 preferred 160,000 145,559 152,740 $ 25.00 $ 3,639 $ 3,818 $ 27.50
$2.50 preferred 105,000 97,252 102,532 50.00 4,863 5,127 51.00
$2.36 preferred 120,000 38,506 40,000 50.00 1,925 2,000 51.00
$4.35 preferred 150,000 68,386 75,000 100.00 6,839 7,500 102.00
Serial preferred: 1,000,000
$2.40 Series A 234,839 239,900 50.00 11,742 11,995 50.50
$2.625 Series C 231,572 240,000 50.00 11,579 12,000 51.00
$2.275 Series D 164,101 199,655 50.00 8,205 9,983 50.50
$3.25 Series E 312,991 320,000 50.00 15,649 16,000 51.00
Serial preferred: 4,000,000(b)
Adjustable rate
Series Q 352,851 372,851 100.00 35,285 37,285 (c)
Serial preferred: 10,000,000
$1.8125 Series W 1,693,016 2,398,615 25.00 42,325 59,965 (d)
---------------------- --------------------
Total 3,339,073 4,141,293 $142,051 $165,673
====================== ====================
Redeemable:
Serial preferred:
$10.00 Series U 291,098 410,000 $100.00 $ 29,110 $ 41,000
$7.875 Series V - 120,000 100.00 - 12,000
---------------------- --------------------
Total 291,098 530,000 $ 29,110 $ 53,000
====================== ====================
</TABLE>
(a) The actual call price per share is the indicated amount plus any accrued
dividends.
(b) This authorization also covers all outstanding redeemable preferred stock.
(c) Dividend rate adjusted quarterly to 2% below that of certain United States
Treasury securities, but in no event less than 6% or greater than 12% per
annum. Redeemable at par.
(d) Redeemable at par after December 1, 1998.
40
<PAGE>
If there were to be any arrearage in dividends on any of its preferred stock or
in the sinking fund requirements applicable to any of its redeemable preferred
stock, APS could not pay dividends on its common stock or acquire any shares
thereof for consideration. The redemption requirements for the above issues for
the next three years are: 1998, $10.0 million; 1999, $10.0 million; and 2000,
$9.1 million. There are no redemption requirements in 2001 and 2002.
Redeemable preferred stock transactions of APS during each of the three years in
the period ended December 31, 1997 are as follows:
Number of Par Value
(Dollars in Thousands) Shares Amount
- ----------------------------------------------------------------
Balance, December 31, 1994 750,000 $ 75,000
Retirements - -
-----------------------
Balance, December 31, 1995 750,000 75,000
Retirements
$10.00 Series U (90,000) (9,000)
$7.875 Series V (130,000) (13,000)
-----------------------
Balance, December 31, 1996 530,000 53,000
Retirements
$10.00 Series U (118,902) (11,890)
$7.875 Series V (120,000) (12,000)
-----------------------
Balance, December 31, 1997 291,098 $ 29,110
=======================
8. COMMON STOCK
The Company's common stock issued during each of the three years in the period
ended December 31, 1997 is as follows:
Number of
(Dollars in Thousands) Shares Amount (a)
- -------------------------------------------------------------------
Balance, December 31, 1994 87,429,642 $1,641,196
Common stock issued 86,205 (2,512)
--------------------------
Balance, December 31, 1995 87,515,847 1,638,684
Common stock issued - (2,330)
--------------------------
Balance, December 31, 1996 87,515,847 1,636,354
Common stock issued - (2,586)
Common stock retired (2,690,900) (79,997)
--------------------------
Balance, December 31, 1997 84,824,947 $1,553,771
==========================
(a) Including premiums and expenses of preferred stock issues of APS.
9. RETIREMENT PLANS AND OTHER BENEFITS
Voluntary Severance Plan
APS sponsored a voluntary severance plan in 1996, which resulted in a pretax
charge of $31.7 million (including pension and postretirement benefit expense)
recorded primarily as operations and maintenance expense. Employees
participating in the plan were credited with an additional year of age and
service for purposes of calculating pension and postretirement benefits. The
total additional pension and postretirement benefit expense recorded in 1996 for
this program was $2.3 million and $5.4 million, respectively.
Pension Plans
The Company sponsors defined benefit pension plans covering substantially all
employees. Benefits are based on years of service and compensation utilizing a
final average pay benefit formula. Company policy is to fund not less than the
minimum required contribution nor greater than the maximum tax-deductible
contribution. Plan assets consist primarily of domestic and international common
stocks and bonds and real estate. Pension expense, including administrative and
severance costs, for 1997, 1996 and 1995 was approximately $9.3 million, $15.5
million and $10.0 million, respectively.
The components of net periodic pension costs before consideration of amounts
capitalized or billed to others and excluding severance costs of $2.9 million in
1996 are as follows:
(Thousands of Dollars) 1997 1996 1995
- -----------------------------------------------------------------------
Service cost - benefits
earned during
the period $ 20,435 $ 23,397 $ 16,390
Interest cost on
projected benefit
obligation 48,402 45,124 39,762
Return on plan assets (88,618) (63,136) (83,031)
Net amortization
and deferral 39,511 19,969 46,469
----------------------------------------
Net consolidated
periodic pension
benefit cost $ 19,730 $ 25,354 $ 19,590
========================================
41
<PAGE>
A reconciliation of the funded status of the plan to the amounts recognized in
the balance sheets is presented below:
(Thousands of Dollars) 1997 1996
- -----------------------------------------------------------------
Plan assets at fair value $ 619,412 $ 539,179
-----------------------
Less:
Accumulated benefit
obligation, including vested
benefits of $499,559 and
$418,052 in 1997 and 1996,
respectively 558,967 472,864
Effect of projected future
compensation increases 149,177 135,811
-----------------------
Total projected benefit obligation 708,144 608,675
-----------------------
Plan assets less than projected
benefit obligation (88,732) (69,496)
Plus:
Unrecognized net loss
from past experience
different from that assumed 16,943 3,314
Unrecognized prior service cost 24,792 20,563
Unrecognized net
transition asset (26,462) (29,690)
-----------------------
Accrued pension liability $ (73,459) $ (75,309)
=======================
Principal actuarial assumptions used were:
1997 1996
- -----------------------------------------------------------------
Discount rate 7.25% 7.75%
Rate of increase in
compensation levels 4.50% 4.50%
Expected long-term rate
of return on assets 9.00% 9.00%
In addition to the defined benefit pension plans, the Company also sponsors
qualified defined contribution plans. Collectively, these plans cover
substantially all employees. The plans provide for employee contributions and
partial employer matching contributions after certain eligibility requirements
are met. Expenses related to these plans for 1997, 1996 and 1995 were $3.9
million, $3.6 million and $3.2 million, respectively.
Postretirement Plans
The Company provides medical and life insurance benefits to its retired
employees. Employees must retire to become eligible for these retirement
benefits, which are based on years of service and age. The retiree medical
insurance plans are contributory; the retiree life insurance plans are
non-contributory. In accordance with the governing plan documents, the Company
retains the right to change or eliminate these benefits.
Funding is based upon actuarially determined contributions that take tax
consequences into account. Plan assets consist primarily of domestic stocks and
bonds. The postretirement benefit expense for 1997, 1996 and 1995 was
approximately $9.8 million, $16.2 million and $13.7 million, respectively.
The components of net periodic postretirement benefit costs before consideration
of amounts capitalized or billed to others and excluding severance costs of $9.6
million in 1996 are as follows:
(Thousands of Dollars) 1997 1996 1995
- ----------------------------------------------------------------
Service cost - benefits
earned during
the period $ 7,046 $ 8,168 $ 6,925
Interest cost on
accumulated benefit
obligation 14,441 13,525 13,879
Return on plan assets (30,846) (12,550) (15,133)
Net amortization
and deferral 27,153 12,778 17,179
-----------------------------------
Net consolidated
periodic postretire-
ment benefit cost $ 17,794 $ 21,921 $ 22,850
===================================
42
<PAGE>
A reconciliation of the funded status of the plan to the amounts recognized in
the balance sheets is presented below:
(Thousands of Dollars) 1997 1996
- --------------------------------------------------------------
Plan assets at fair value $ 151,146 $ 109,763
----------------------
Less accumulated postretirement
benefit obligation:
Retirees 95,309 87,146
Fully eligible plan participants 6,120 3,720
Other active plan participants 97,919 90,539
----------------------
Total accumulated postretirement
benefit obligation 199,348 181,405
----------------------
Plan assets less than accumulated
benefit obligation (48,202) (71,642)
Plus:
Unrecognized transition
obligation 115,541 123,239
Unrecognized net gain from past
experience different from
that assumed (79,013) (62,759)
----------------------
Accrued postretirement liability $ (11,674) $ (11,162)
======================
Principal actuarial assumptions used were:
1997 1996
- --------------------------------------------------------------
Discount rate 7.25% 7.75%
Annual salary increases for life
insurance obligation 4.50% 4.50%
Expected long-term rate of return
on assets - after tax 7.75% 7.75%
Initial health care cost trend
rate - under age 65 8.00% 9.00%
Initial health care cost trend
rate - age 65 and over 7.00% 8.00%
Ultimate health care cost trend
rate (reached in the year 2002) 5.00% 5.50%
Assuming a 1% increase in the health care cost trend rate, the 1997 cost of
postretirement benefits other than pensions would increase by approximately $6
million and the accumulated benefit obligation as of December 31, 1997 would
increase by approximately $34 million.
10. LEASES
In 1986, APS entered into sale and leaseback transactions under which it sold
approximately 42% of its share of Palo Verde Unit 2 and certain common
facilities. The gain of approximately $140.2 million has been deferred and is
being amortized to operations expense over the original lease term of 29.5
years. The leases are being accounted for as operating leases. The amounts to be
paid each year approximate $40.1 million through 1999, $46.3 million in 2000,
and $49.0 million through 2015. Options to renew for two additional years and to
purchase the property at fair market value at the end of the lease terms are
also included. Consistent with the ratemaking treatment, an amount equal to the
annual lease payments is included in rent expense. A regulatory asset is
recognized for the difference between lease payments and rent expense calculated
on a straight-line basis.
In accordance with the 1996 regulatory agreement (see Note 3), the ACC
accelerated APS' amortization of the regulatory asset for leases to an
eight-year period that began July 1, 1996. The accelerated amortization is
included in depreciation and amortization expense on the Consolidated Statements
of Income. The balance of this regulatory asset at December 31, 1997 was $53.2
million. Lease expense was approximately $42 million in each of the years 1995
through 1997.
APS has a capital lease on a combined cycle plant which it sold and leased back.
The lease requires semiannual payments of $2.6 million through June 2001, and
includes renewal and purchase options based on fair market value. This plant is
included in plant in service at its original cost of $54.4 million; accumulated
amortization at December 31, 1997 was $46.5 million.
In addition, the Company leases certain land, buildings, equipment and
miscellaneous other items through operating rental agreements with varying
terms, provisions and expiration dates. Rent expense for 1997, 1996 and 1995 was
approximately $11.2 million, $12.8 million and $15.4 million, respectively.
Annual future minimum rental commitments, excluding the Palo Verde and combined
cycle leases, through 2002 are as follows: 1998, $16.2 million; 1999, $16.4
million; 2000, $16.7 million; 2001, $17.8 million; and 2002, $18.2 million.
Total rental commitments after the year 2002 are estimated at $160.4 million
43
<PAGE>
11. JOINTLY-OWNED FACILITIES
At December 31, 1997, APS owned interests in the following jointly-owned
electric generating and transmission facilities. APS' share of related operating
and maintenance expenses is included in utility operations and maintenance.
<TABLE>
<CAPTION>
Percent Plant Construction
Owned by In Accumulated Work in
(Dollars in Thousands) APS Service Depreciation Progress
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Generating Facilities
Palo Verde Nuclear Generating Station
Units 1 and 3 29.1% $1,830,794 $ 628,960 $14,498
Palo Verde Nuclear Generating Station
Unit 2 (see Note 10) 17.0% 572,054 213,717 9,338
Four Corners Steam Generating Station
Units 4 and 5 15.0% 148,342 66,470 1,369
Navajo Steam Generating Station
Units 1, 2 and 3 14.0% 182,637 82,326 33,081(a)
Cholla Steam Generating Station
Common Facilities (b) 62.8%(c) 66,106 34,551 580
Transmission Facilities
ANPP 500 KV System 35.8%(c) 62,593 19,107 4,903
Navajo Southern System 31.4%(c) 27,159 16,710 -
Palo Verde - Yuma 500 KV System 23.9%(c) 11,376 3,971 -
Four Corners Switchyards 27.5%(c) 3,071 1,707 1
Phoenix - Mead System 17.1%(c) 36,418 (2,169) 337
</TABLE>
(a) The construction costs at Navajo are primarily related to the installation
of scrubbers required by recent environmental legislation.
(b) APS is the operating agent for Cholla Unit 4, which is owned by PacifiCorp.
The common facilities at the Cholla Plant are jointly-owned.
(c) Weighted average of interests.
- --------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is party to various claims, legal actions and complaints arising in
the ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial statements.
Palo Verde Nuclear Generating Station
APS has encountered tube cracking in 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.
During the fourth quarter of 1997, the Palo Verde participants, including APS,
entered into a contract for the fabrication of two replacement steam generators.
The cost to APS is estimated at approximately $26 million. These generators will
be used as replacements if performance of existing generators deteriorates to
less than acceptable levels. The generators are expected on site in 2002. APS'
share of installation costs is approximately $24 million.
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.
Under the Nuclear Waste Policy Act, DOE was to develop the facilities necessary
for the storage and disposal of spent fuel and to have the first such facility
in operation by 1998. That facility was to be a permanent repository, but DOE
has announced that such a repository now cannot be completed before 2010. In
November 1997, the Court of Appeals for the D.C. Circuit affirmed its previous
decision that DOE must begin accepting spent fuel by 1998 and issued an order
precluding DOE from excusing its own delay on the grounds that DOE has not yet
prepared a permanent repository or interim storage facility.
The Company has capacity in existing fuel storage pools at Palo Verde which,
with certain modifications, could accommodate all fuel expected to be discharged
from normal operation of Palo Verde through about 2002, and believes it could
augment that wet storage with new facilities for on-site dry storage of spent
fuel for an indeterminate period of operation beyond 2002, subject to obtaining
any required governmental approvals. The Company currently believes that spent
fuel storage or disposal methods will be available for use by Palo Verde to
allow its continued operation beyond 2002.
44
<PAGE>
The Palo Verde participants have insurance for public liability 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 the programs 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 for all three units 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.
Fuel and Purchased Power Commitments
APS is a party to various fuel and purchased power contracts with terms expiring
from 1998 through 2020 that include required purchase provisions. APS estimates
its 1998 contract requirements to be approximately $136 million. However, this
amount may vary significantly pursuant to certain provisions in such contracts
which permit APS to decrease its required purchases under certain circumstances.
APS is contractually obligated to reimburse certain coal providers for amounts
incurred for coal mine reclamation. APS' share of the total obligation is
estimated at $110 million. The portion of the coal mine reclamation obligation
related to coal already burned is approximately $66 million at December 31, 1997
and is included in "Deferred Credits-Other" in the Consolidated Balance Sheets.
A regulatory asset has been established for amounts not yet recovered from
ratepayers. In accordance with the 1996 regulatory agreement (see Note 3), the
ACC began accelerated amortization of APS' regulatory asset for coal mine
reclamation costs over an eight-year period beginning July 1, 1996. Amortization
is included in depreciation and amortization expense on the Consolidated
Statements of Income. The balance of the regulatory asset at December 31, 1997
was approximately $60 million.
Construction Program
Consolidated capital expenditures in 1998 are estimated at $368 million.
13. NUCLEAR DECOMMISSIONING COSTS
APS recorded $11.4 million for decommissioning expense in each of the years 1997
and 1996. APS estimates it will cost approximately $2.0 billion ($460 million in
1997 dollars), over a 14-year period beginning in 2024, to decommission its
29.1% interest in the three Palo Verde units. Decommissioning costs are charged
to expense over the respective unit's operating license term and are included in
the accumulated depreciation balance until each unit is retired. Nuclear
decommissioning costs are recovered in rates.
APS is utilizing a 1995 site-specific study for Palo Verde, prepared for APS by
an independent consultant, that assumes the prompt removal/dismantlement method
of decommissioning. APS is required to update the study every three years.
As required by regulation, APS has established external trust accounts into
which quarterly deposits are made for decommissioning. As of December 31, 1997
and 1996, APS had deposited a total of $79.5 million and $68.1 million,
respectively. The trust accounts are included in "Investments and Other Assets"
on the Consolidated Balance Sheets at a market value of $124.6 million and $95.5
million on December 31, 1997 and 1996, respectively. The trust funds are
invested primarily in fixed-income securities and domestic stock and are
classified as available for sale. Realized and unrealized gains and losses are
reflected in accumulated depreciation.
In February 1996, the FASB issued an exposure draft "Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets" which would
require the estimated present value of the cost of decommissioning and certain
other removal costs to be recorded as a liability, along with an offsetting
plant asset when a decommissioning or other removal obligation is incurred. The
FASB has not determined when a revised exposure draft or a final statement will
be issued.
45
<PAGE>
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated quarterly financial information for 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands, Except per Share Amounts) 1997
Quarter Ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------
Operating revenues
<S> <C> <C> <C> <C>
Electric $ 379,021 $ 458,751 $ 632,821 $ 407,960
Real estate 19,543 30,166 30,929 35,835
Operating income (a) $ 82,471 $ 150,024 $ 243,454 $ 81,557
Net income $ 25,382 $ 67,182 $ 124,340 $ 18,952
Earnings per average common share outstanding
Continuing operations and net income - basic $ 0.29 $ 0.79 $ 1.47 $ 0.21
Continuing operations and net income - diluted $ 0.29 $ 0.78 $ 1.46 $ 0.21
Dividends declared per share (b) $ 0.275 $ 0.55 $ - $ 0.30
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands, Except per Share Amounts) 1996
Quarter Ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues
Electric $ 345,261 $ 426,658 $ 566,899 $ 379,454
Real estate 15,994 26,150 31,892 25,452
Operating income (a) $ 106,562 $ 152,094 $ 245,800 $ 39,403
Income (loss) from continuing operations (c) $ 34,859 $ 61,454 $ 121,406 $ (6,660)
Loss from discontinued operations - net of income tax - - - (9,539)
Extraordinary charge for early retirement of debt -
net of income tax (3,597) (2,471) (14,272) -
-------------------------------------------------
Net income (loss) $ 31,262 $ 58,983 $ 107,134 $ (16,199)
=================================================
Earnings (loss) per average common share
outstanding
Continuing operations - basic $ 0.40 $ 0.70 $ 1.39 $ (0.08)
Discontinued operations - basic - - - (0.11)
Extraordinary charge - basic (0.04) (0.03) (0.16) -
-------------------------------------------------
Net income - basic $ 0.36 $ 0.67 $ 1.23 $ (0.19)
=================================================
Continuing operations - diluted $ 0.40 $ 0.70 $ 1.38 $ (0.08)
Discontinued operations - diluted - - - (0.11)
Extraordinary charge - diluted (0.04) (0.03) (0.16) -
-------------------------------------------------
Net income - diluted $ 0.36 $ 0.67 $ 1.22 $ (0.19)
=================================================
Dividends declared per share (d) $ 0.25 $ 0.50 $ 0.275 $ -
</TABLE>
(a) APS operations are subject to seasonal fluctuations primarily as a result
of weather conditions. The results of operations for interim periods are
not necessarily indicative of the results to be expected for the full year.
(b) Dividends for the quarter ended September 30, 1997 were declared in June.
(c) Net loss for the quarter ended December 31, 1996 includes a charge of $18.9
million for a voluntary severance program.
(d) Dividends for the quarters ended September 30 and December 31, 1996 were
declared in June and September, respectively.
46
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the carrying amounts of its cash equivalents and
commercial paper are reasonable estimates of their fair values at December 31,
1997 and 1996 due to their short maturities.
Investments in debt and equity securities are held for purposes other than
trading. The December 31, 1997 and 1996 fair values of such investments,
determined by using quoted market values or by discounting cash flows at rates
equal to the Company's cost of capital, approximate their carrying amounts.
The carrying value of long-term debt (excluding a capitalized lease obligation)
on December 31, 1997 and 1996 was $2.34 billion and $2.51 billion, respectively,
and the estimated fair value was $2.38 billion and $2.47 billion, respectively.
The fair value estimates are based on quoted market prices of the same or
similar issues.
16. EARNINGS PER SHARE
In 1997 the Company adopted SFAS No. 128 "Earnings Per Share." This statement
requires the presentation of both basic and diluted earnings per share on the
financial statements. The following table presents earnings per average common
share outstanding (EPS):
1997 1996 1995
- ---------------------------------------------------
Basic EPS:
Continuing
operations $ 2.76 $ 2.41 $ 2.28
Discontinued
operations - (0.11) -
Extraordinary
charge - (0.23) (0.13)
-----------------------------
Net income $ 2.76 $ 2.07 $ 2.15
=============================
Diluted EPS:
Continuing
operations $ 2.74 $ 2.40 $ 2.27
Discontinued
operations - (0.11) -
Extraordinary
charge - (0.23) (0.13)
-----------------------------
Net income $ 2.74 $ 2.06 $ 2.14
=============================
Dilutive stock options increased average common shares outstanding by 519,800
shares, 580,405 shares, and 464,926 shares in 1997, 1996 and 1995, respectively,
but had no effect on net income. Total average common shares outstanding for the
purposes of calculating diluted earnings per share were 86,022,709 shares,
88,021,920 shares and 87,884,226 shares in 1997, 1996 and 1995, respectively.
Options to purchase 254,450 shares of common stock at $39.75 per share were
outstanding since the last quarter of 1997 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. The options were still
outstanding at the end of 1997.
17. STOCK OPTIONS
The Company has incentive plans under which it may grant non-qualified stock
options (NQSOs), incentive stock options (ISOs) and restricted stock awards to
officers and key employees.
The plans provide for the granting of new options or awards of up to 3.5 million
shares at a price per option not less than fair market value on the date the
option is granted. The plans also provide for the granting of any combination of
stock appreciation rights or dividend equivalents. The awards outstanding under
the various incentive plans at December 31, 1997 approximate 1,486,417 NQSOs,
183,190 restricted shares, and no dividend equivalent shares, ISOs or stock
appreciation rights.
The FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation" which was
effective for 1996. The statement encourages, but does not require, companies to
recognize compensation expense based on the fair value method. The Company
continues to recognize expense based on Accounting Principles Board Opinion No.
25. Had the Company determined compensation expense based on the fair value of
its stock options, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
(Dollars in Thousands,
Except per Share Amounts) 1997 1996 1995
- ---------------------------------------------------------------------
Net income
As reported $235,856 $181,180 $188,037
Pro forma $235,446 $180,969 $188,010
Net income per share
As reported $2.76 $ 2.07 $ 2.15
Pro forma $2.75 $ 2.07 $ 2.15
The fair value of each fixed stock option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
1997 1996 1995
- -------------------------------------------------------------------
Risk-free interest rate 5.66% 5.77% 5.43%
Dividend growth 4.50% 4.50% 4.50%
Volatility 15.63% 17.10% 12.60%
Expected life (months) 60 58 56
The effects of applying SFAS No. 123 for disclosing compensation cost may not be
representative of the effects on reported net income for future years because
pro forma net income does not consider compensation costs for stock options
granted prior to January 1, 1995.
47
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
-----------------------------
Balance at Charged to Charged Balance
beginning cost and to other at end of
Description of period expenses accounts Deductions preiod
----------- --------- -------- -------- ---------- ------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Real Estate Valuation Reserves $ 41,000 $ - $ - $ 18,000 $ 23,000
YEAR ENDED DECEMBER 31, 1996
Real Estate Valuation Reserves $ 47,000 $ - $ - $ 6,000 $ 41,000
YEAR ENDED DECEMBER 31, 1995
Real Estate Valuation Reserves $ 84,000 $ - $ - $ 37,000(a) $ 47,000
</TABLE>
(a) Represents pro-rata allocations for sale of land.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
Reference is hereby made to "Election of Directors" in the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 20,
1998 (the "1998 Proxy Statement") and to the Supplemental Item --- "Executive
Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Reference is hereby made to the fourth and fifth paragraphs under the
heading "The Board and its Committees," to "Executive Compensation," to "Human
Resources Committee Report," to "Stock Performance Comparisons" and to
"Executive Benefit Plans" in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to "Certain Securities Ownership" in the 1998
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to "Executive Benefit Plans --- Employment and
Severance Agreements" in the 1998 Proxy Statement.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
See the Index to Consolidated Financial Statements and Financial Statement
Schedule in Part II, Item 8.
Exhibits Filed
Exhibit No. Description
- ----------- -----------
10.1a --- Summary of the Pinnancle West Capital Corporation 1998 Bonus Plan
21 --- Subsidiaries of the Company
23.1 --- Consent of Deloitte & Touche LLP
27.1 --- Financial Data Schedule
In addition to those Exhibits shown above, the Company hereby incorporates
the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation
ss.229.10(d) by reference to the filings set forth below:
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
3.2 Articles of Incorporation, 19.1 to the Company's 1-8962 11-14-88
restated as of July 29, 1988 September 1988 Form 10-Q
Report
3.3 Bylaws, amended as of 3.1 to the Company's 1995 1-8962 4-1-96
February 21, 1996 Form 10-K Report
4.1 Mortgage and Deed of Trust 4.1 to APS' September 1992 1-4473 11-9-92
Relating to APS' First Form 10-Q Report
Mortgage Bonds, together
with forty-eight indentures
supplemental thereto
4.2 Forty-ninth Supplemental 4.1 to APS' 1992 Form 10-K 1-4473 3-30-93
Indenture Report
4.3 Fiftieth Supplemental 4.2 to APS' 1993 Form 10-K 1-4473 3-30-94
Indenture Report
4.4 Fifty-first Supplemental 4.1 to APS' August 1, 1993 1-4473 9-27-93
Indenture Form 8-K Report
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
4.5 Fifty-second Supplemental 4.1 to APS' September 30, 1993 1-4473 11-15-93
Indenture Form 10-Q Report
4.6 Fifty-third Supplemental 4.5 to APS' Registration 1-4473 3-1-94
Indenture Statement No. 33-61228 by
means of February 23, 1994
Form 8-K Report
4.7 Fifty-fourth Supplemental 4.1 to APS' Registration 1-4473 11-22-96
Indenture Statements Nos. 33-61228,
33-55473, 33-64455 and
333-15379 by means of
November 19, 1996 Form 8-K
Report
4.8 Fifty-fifth Supplemental 4.8 to APS' Registration 1-4473 4-9-97
Indenture Statement Nos. 33-55473, 33-
64455 and 333-15379 by means
of April 7, 1997 Form 8-K
Report
4.9 Agreement, dated March 21, 4.1 to APS' 1993 Form 10-K 1-4473 3-30-94
1994, relating to the filing of Report
instruments defining the
rights of holders of APS
long-term debt not in excess
of 10% of APS' total assets
4.10 Indenture dated as of January 4.6 to APS' Registration 1-4473 1-11-95
1, 1995 among APS and The Statement Nos. 33-61228 and
Bank of New York, as 33-55473 by means of January
Trustee 1, 1995 Form 8-K Report
4.11 First Supplemental Indenture 4.4 to APS' Registration 1-4473 1-11-95
dated as of January 1, 1995 Statement Nos. 33-61228 and
33-55473 by means of January
1, 1995 Form 8-K Report
4.12 Indenture dated as of 4.5 to APS' Registration 1-4473 11-22-96
November 15, 1996 among Statements Nos. 33-61228,
APS and The Bank of New 33-55473, 33-64455 and 333-
York, as Trustee 15379 by means of November
19, 1996 Form 8-K Report
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
4.13 First Supplemental Indenture 4.6 to APS' Registration 1-4473 11-22-96
Statements Nos. 33-61228,
33-55473, 33-64455 and 333-
15379 by means of November
19, 1996 Form 8-K Report
4.14 Second Supplemental 4.10 to APS' Registration 1-4473 4-9-97
Indenture Statement Nos. 33-55473, 33-
64455 and 333-15379 by means
of April 7, 1997 Form 8-K
Report
4.15 Agreement of Resignation, 4.1 to APS' September 25, 1995 1-4473 10-24-95
Appointment, Acceptance Form 8-K Report
and Assignment dated as of
August 18, 1995 by and
among APS, Bank of
America National Trust and
Savings Association and The
Bank of New York
4.16 Rights Agreement, amended 4.1 to the Company's 1990 1-8962 3-28-91
as of November 14, 1990, Form 10-K Report
between the Company and
The Valley National Bank of
Arizona, as Rights Agent,
which includes the Certificate
of Designation of Series A
Participating Preferred Stock
as Exhibit A, the form of
Rights Certificate as Exhibit
B and the Summary of Rights
as Exhibit
4.17 Specimen Certificate of 4.2 to the Company's 1988 1-8962 3-31-89
Pinnacle West Capital Form 10-K Report
Corporation Common Stock,
no par value
4.18 Agreement, dated March 29, 4.1 to the Company's 1987 1-8962 3-30-88
1988, relating to the filing of Form 10-K Report
instruments defining the
rights of holders of long-term
debt not in excess of 10% of
the Company's total assets
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
4.19 Indenture dated as of January 4.10 to APS' Registration 1-4473 1-16-98
15, 1998 among APS and The Statement Nos. 333-15379 and
Chase Manhattan Bank, as 333-27551 by means of January
Trustee 13, 1998 Form 8-K Report
4.20 First Supplemental Indenture 4.3 to APS' Registration 1-4473 1-16-98
dated as of January 15, 1998 Statement Nos. 333-15379 and
333-27551 by means of January
13, 1998 Form 8-K Report
10.3 Agreement, dated December 4.1 to the Company's December 1-8962 12-7-89
6, 1989, between the 6, 1989 Form 8-K Report
Company and the Office of
Thrift Supervision, United
States Department of
Treasury, and related
documents
10.4 Release from the Office of 10.1 to the Company's 1989 1-8962 3-31-89
Thrift Supervision, United Form 10-K Report
States Department of
the Treasury, to the
Company, dated March 22,
1990, releasing the Company
from its purported obligations
under the Stipulation and
under any other source of
alleged obligation of the
Company to infuse equity
capital into MeraBank
10.5 Release from the Federal 10.2 to the Company's 1989 1-8962 3-31-89
Deposit Insurance Form 10-K Report
Corporation to the Company,
dated Marc 22, 1990,
releasing the Company from
its purported obligations
under the Stipulation and
under any other source of
alleged obligation of the
Company to infuse equity
capital into MeraBank
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.6 Release from the Resolution 10.3 to the Company's 1989 1-8962 3-31-89
Trust Corporation (in its Form 10-K Report
corporate capacity) to the
Company, dated March 21,
1990, releasing the Company,
from its purported obligation
under the Stipulation and
under any other source of
alleged obligation of the
Company to infuse equity
capital into MeraBank
10.7 Release from the Resolution 10.4 to the Company's 1989 1-8962 3-31-89
Trust Corporation (in its Form 10-K Report
capacity as Receiver of
MeraBank) to the Company,
dated March 21, 1990,
releasing the Company from
its purported obligations
under the Stipulation and
under any other source of
alleged obligation to the
Company to infuse equity
capital into MeraBank
10.8ad Form of Key Executive 10.5 to the Company's 1989 1-8962 3-31-89
Employment and Severance Form 10-K Report
Agreement between the
Company and each of its
executive officers
10.9a Employment Agreement, 10.1 to the Company's 1990 2-96386 3-28-91
effective as of February 5, Form 10-K Report
1990, between Richard Snell
and the Company
10.10 Two separate 10.2 to APS' September 1991 1-4473 11-14-91
Decommissioning Trust Form 10-Q Report
Agreements (relating to
PVNGS Units 1 and 3,
respectively), each dated July
1, 1991, between APS and
Mellon Bank, N.A., as
Decommissioning Trustee
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.11 Amendment No. 1 to 10.1 to APS' 1994 Form 10- K 1-4473 3-30-95
Decommissioning Trust Report
Agreement (PVNGS Unit 1),
dated as of December 1, 1994
10.12 Amendment No. 1 to 10.2 to APS' 1994 Form 10-K 1-4473 3-30-95
Decommissioning Trust Report
Agreement (PVNGS Unit 3),
dated as of December 1, 1994
10.13 Amendment No. 2 to APS 10.4 to APS' 1996 Form 10-K 1-4473 3-28-97
Decommissioning Trust Report
Agreement (PVNGS Unit 1)
dated as of July 1, 1991
10.14 Amendment No. 2 to APS 10.6 to APS' 1996 Form 10-K 1-4473 3-28-97
Decommissioning Trust Report
Agreement (PVNGS Unit 3)
dated as of July 1, 1991
10.15 Amended and Restated 10.1 to the Company's 1991 1-8962 3-26-92
Decommissioning Trust Form 10-K Report
Agreement (PVNGS Unit 2)
dated as of January 31, 1992,
among APS, Mellon Bank,
N.A., as Decommissioning
Trustee, and State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee under two
separate Trust Agreements,
each with a separate Equity
Participant, and as Lessor
under two separate Facility
Leases, each relating to an
undivided interest in PVNGS
Unit 2
10.16 First Amendment to 10.2 to APS' 1992 Form 10-K 1-4473 3-30-93
Amended and Restated Report
Decommissioning Trust
Agreement (PVNGS Unit 2),
dated as of November 1, 1992
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.17 Amendment No. 2 to 10.2 to APS' 1994 Form 10-K 1-4473 3-30-95
Amended and Restated Report
Decommissioning Trust
Agreement (PVNGS Unit 2),
dated as of November 1, 1994
10.18 Amendment No. 3 to 10.1 to APS' June 1996 Form 1-4473 8-9-96
Amended and Restated 10-Q Report
Decommissioning Trust
Agreement (PVNGS Unit 2),
dated as of November 1, 1994
10.19 Amendment No. 4 to APS 10.5 to APS' 1996 Form 10-K 1-4473 3-28-97
Amended and Restated Report
Decommissioning Trust
Agreement (PVNGS Unit 2)
dated as of January 31, 1992
10.20 Asset Purchase and Power 10.1 to APS' June 1991 Form 1-4473 8-8-91
Exchange Agreement dated 10-Q Report
September 21, 1990 between
APS and PacifiCorp, as
amended as of October 11,
1990 and as of July 18, 1991
10.21 Long-Term Power 10.2 to APS' June 1991 Form 1-4473 8-8-91
Transaction Agreement dated 10-Q Report
September 21, 1990 between
APS and PacifiCorp, as
amended as of October 11,
1990, and as of July 8, 1991
10.22 Amendment No. 1 dated 10.3 to APS' 1995 Form 10-K 1-4473 3-29-96
April 5, 1995 to the Report
Long-Term Power
Transaction Agreement and
Asset Purchase and Power
Exchange Agreement
between PacifiCorp and APS
10.23 Restated Transmission 10.4 to APS' 1995 Form 10-K 1-4473 3-29-96
Agreement between Report
PacifiCorp and APS dated
April 5, 1995
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.24 Contract among PacifiCorp, 10.5 to APS' 1995 Form 10-K 1-4473 3-29-96
APS and United States Report
Department of Energy
Western Area Power
Administration, Salt Lake
Area Integrated Projects for
Firm Transmission Service
dated May 5, 1995
10.25 Reciprocal Transmission 10.6 to APS' 1995 Form 10-K 1-4473 3-29-86
Service Agreement between Report
APS and PacifiCorp dated as
of March 2, 1994
10.26 Contract, dated July 21, 1984, 10.31 to the Company's Form 2-96386 3-13-85
with DOE providing for the S-14 Registration Statement
disposal of nuclear fuel
and/or high-level radioactive
waste, ANPP
10.27 Indenture of Lease with 5.01 to APS' Form S-7 2-59644 9-1-77
Navajo Tribe of Indians, Four Registration Statement
Corners Plant
10.28 Supplemental and Additional 5.02 to APS' Form S-7 2-59644 9-1-77
Indenture of Lease, including Registration Statement
amendments and supplements
to original lease with Navajo
Tribe of Indians, Four
Corners Plant
10.29 Amendment and Supplement 10.36 to the Company's 1-8962 7-25-85
No. 1 to Supplemental and Registration Statement on Form
Additional Indenture of Lease 8-B Report
Four Corners, dated April 25,
1985
10.30 Application and Grant of 5.04 to APS' Form S-7 2-59644 9-1-77
10.31 multi-party Registration Statement
rights-of-way and easements,
Four Corners Plant Site
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.31 Application and Amendment 10.37 to the Company's 1-8962 7-25-85
No. 1 to Grant of multi-party Registration Statement on Form
rights-of-way and easements, 8-B
Four Corners Power Plant
Site dated April 25, 1985
10.32 Application and Grant of 5.05 to APS' Form S-7 2-59644 9-1-77
Arizona Public Service Registration Statement
Company rights-of-way and
easements, Four Corners
Plant Site
10.33 Application and Amendment 10.38 to the Company's 1-8962 7-25-85
No. 1 to Grant of Arizona Registration Statement on Form
Public Service Company 8-B
rights-of-way and easements,
Four Corners Power Plant Site
dated April 25, 1985
10.34 Indenture of Lease, Navajo 5(g) to APS' Form S-7 2-36505 3-23-70
Units 1, 2, and 3 Registration Statement
10.35 Application and Grant of 5(h) to APS' Form S-7 2-36505 3-23-70
rights-of-way and easements, Registration Statement
Navajo Plant
10.36 Water Service Contract 5(1) to APS' Form S-7 2-394442 3-16-71
Assignment with the United Registration Statement
States Department of Interior,
Bureau of Reclamation,
Navajo Plant
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.37 Arizona Nuclear Power 10. 1 to APS' 1988 Form 10-K 1-4473 3-8-89
Project Participation
Agreement, dated August 23,
1973, among APS Salt River
Project Agricultural
Improvement and Power
District, Southern California
Edison Company' Public
Service Company of New
Mexico, El Paso Electric
Company, Southern
California Public Power
Authority, and Department of
Water and Power of the City
of Los Angeles, and
amendments 1-12 thereto
10.38 Amendment No. 13, dated as 10.1 to APS' March 1991 Form 1-4473 5-15-91
of April 22, 1991, to Arizona 10-Q
Nuclear Power Project
Participation Agreement,
dated August 23, 1973,
among APS, Salt River
Project Agricultural
Improvement and Power
District, Southern California
Edison Company, Public
Service Company of New
Mexico, El Paso Electric
Company, Southern
California Public Power
Authority, and Department of
Water and Power of the City
of Los Angeles
10.39c Facility Lease, dated as of 4.3 to APS' Form S-3 33-9480 10-24-86
August 1, 1986, between Registration Statement
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its capacity as
Owner Trustee, as Lessor,
and APS, as Lessee
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.40c Amendment No. 1, dated as 10.5 to APS' September 1986 1-4473 12-4-86
of November 1, 1986, to Form 10-Q Report by means of
Facility Lease, dated as of Amendment No. on December
August 1, 1986, between 3, 1986 Form 8
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its capacity as
Owner Trustee, as Lessor,
and APS, as Lessee
10.41c Amendment No. 2 dated as of 10.3 to APS' 1988 Form 10-K 1-4473 3-8-89
June 1, 1987 to Facility Lease Report
dated as of August 1, 1986
between State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Lessor, and APS, as Lessee
10.42c Amendment No. 3, dated as 10.3 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Facility Report
Lease, dated as of August 1,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Lessor, and APS, as Lessee
10.43 Facility Lease, dated as of 10.1 to APS' November 18 1-4473 1-20-87
December 15, 1986, between 1986 Form 8-K Report
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its capacity as
Owner Trustee, as Lessor,
and APS, as Lessee
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.44 Amendment No. 1, dated as 4.13 to APS' Form S-3 1-4473 8-24-87
of August 1, 1987, to Facility Registration Statement No.
Lease, dated as of December 33-9480 by means of August 1,
15, 1986, between State 1987 Form 8-K Report
Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, as Lessor, and APS,
as Lessee
10.45 Amendment No. 2, dated as 10.4 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Facility Lease, dated as of
December 15, 1986, between
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, as Lessor, and APS,
as Lessee
10.46a Directors' Deferred 10.1 to APS' June 1986 Form 1-4473 8-13-86
Compensation Plan, as 10-Q Report
restated, effective January 1,
1986
10.47a Second Amendment to the 10.2 to APS' 1993 Form 10-K 1-4473 3-30-94
Arizona Public Service Report
Company Deferred
Compensation Plan, effective
as of January 1, 1993
10.48a Third Amendment to the 10.1 to APS' September 1994 1-4473 11-10-94
Arizona Public Service Form 10-Q
Company Directors' Deferred
Compensation Plan, effective
as of May 1, 1993
10.49a Arizona Public Service 10.4 to APS' 1988 Form 10-K 1-4473 3-8-89
Company Deferred Report
Compensation Plan, as
restated, effective January 1,
1984, and the second and
third amendments thereto,
dated December 22, 1986,
and December 23, 1987
respectively
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.50 Third Amendment to the 10.3 to APS' 1993 Form 10-K 1-4473 3-30-94
Arizona Public Service Report
Company Deferred
Compensation Plan, effective
as of January 1, 1993
10.51a Fourth Amendment to the 10.2 to APS' September 1994 1-4473 11-10-94
Arizona Public Service Form 10-Q Report
Company Deferred
Compensation Plan effective
as of May 1, 1993
10.52a Fifth Amendment to the 10.3 to APS' 1996 Form 10-K 1-4473 3-28-97
Arizona Public Service Report
Company Deferred
Compensation Plan
10.53a 1998 APS Management 10.1 to APS' 1997 Form 10-K 1-4473 3-30-98
Variable Pay Plan Report
10.54a 1998 APS Senior 10.2 to APS' 1997 Form 10-K 1-4473 3-30-98
Management Variable Pay Report
Plan
10.55a 1997 APS Officers Variable 10.3 to APS' 1997 Form 10-K 1-4473 3-30-98
Pay Plan Report
10.56a Pinnacle West Capital 10.10 to APS' 1995 Form 10-K 1-4473 3-29-86
Corporation, Arizona Public Report
Service Company, SunCor
Development Company and
El Dorado Investment
Company Deferred
Compensation Plan as
amended and restated
effective January 1, 1996
10.57a Arizona Public Service 10.11 to APS' 1995 Form 10-K 1-4473 3-29-86
Company Supplemental Report
Excess Benefit Retirement
Plan as amended and restated
on December 20, 1995
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.58a Pinnacle West Capital 10.7 to APS' 1994 Form 10-K 1-4473 3-30-95
Corporation and Arizona Report
Public Service Company
Directors' Retirement Plan,
effective as of January 1,
1995
10.59a Letter Agreement dated 10.7 to APS' 1994 Form 10-K 1-4473 3-30-96
December 21, 1993, between Report
APS and William L. Stewart
10.60a Agreement for Utility 10.6 to APS' 1988 Form 10-K 1-4473 3-8-89
Consulting Services, dated Report
March 1, 1985, between APS
and Thomas G. Woods, Jr.,
and Amendment No. 1 thereto,
dated January 6, 1986
10.61a Letter Agreement, dated April 10.7 to APS' 1988 Form 10-K 1-4473 3-8-89
3, 1978, between APS and O. Report
Mark DeMichele, regarding
certain retirement benefits
granted to Mr. DeMichele
10.62a Letter Agreement dated July 10.1 to APS' September 1995 1-4473 11-14-95
28, 1995, between APS and 10-Q Report
Jaron B. Norberg regarding
certain of Mr. Norberg's
retirement benefits.
10.63a Letter Agreement dated as of 10.8 to APS' 1995 Form 10-K 1-4473 3-29-96
January 1, 1996 between APS Report
and Robert G. Matlock &
Associates, Inc. for
consulting services
10.64 Letter Agreement dated 10.7 to APS' 1996 Form 10-K 1-4473 3-28-97
October 9, 1996 between Report
APS and Jaron B. Norberg
10.65 Letter Agreement dated 10.8 to APS' 1996 Form 10-K 1-4473 3-28-97
August 16, 1996 between Report
APS and William L. Stewart
10.66 Letter Agreement between 10.2 to APS' September 1997 1-4473 11-12-97
APS and William L. Stewart Form 10-Q Report
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.67 Letter Agreement dated 10.9 to APS' 1996 Form 10-K 1-4473 3-28-97
November 27, 1996 between Report
APS and George A.
Schreiber, Jr.
10.68ad Key Executive Employment 10.3 to APS' 1989 Form 10-K 1-4473 3-8-90
and Severance Agreement Report
between APS and certain
executive of officers of APS
10.69ad Revised form of Key 10.5 to APS' 1993 Form 10-K 1-4473 3-30-94
Executive' Employment and Report
Severance Agreement
between APS and certain
executive officers of APS
10.70ad Second revised form of Key 10.9 to APS' 1994 Form 10-K 1-4473 3-30-95
Executive Employment and Report
Severance Agreement
between APS and certain
executive officers of APS
10.71ad Key Executive Employment 10.4 to APS' 1989 Form 10-K 1-4473 3-8-90
and Severance Agreement Report
between APS and certain
managers of APS
10.72ad Revised form of Key 10.4 to APS' 1993 Form 10-K 1-4473 3-30-94
Executive Employment and Report
Severance Agreement
between APS and certain key
employees of APS
10.73ad Second revised Form of Key 10.8 to APS' 1994 Form 10-K 1-4473 3-30-95
Executive Employment and Report
Severance Agreement
between APS and certain key
employees of APS
10.74a Pinnacle West Capital 10.1 to APS' 1992 Form 10-K 1-4473 3-30-93
Corporation Stock Option and Report
Incentive Plan
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.75a Pinnacle West Capital A to the Proxy Statement for the 1-8962 4-16-94
Corporation 1994 Long-Term Plan Report for the Company's
Incentive Plan, effective as of 1994 Annual Meeting of
March 23, 1994 Shareholders
10.76a Pinnacle West Capital B to the Proxy Statement for the 1-8962 4-16-94
Corporation Director Equity Plan Report for the Company's
Participation Plan 1994 Annual Meeting of
Shareholders
10.77 Agreement No. 13904 10.3 to APS' 1991 Form 10-K 1-4473 3-19-92
(Option and Purchase of Report
Effluent) with Cities of
Phoenix, Glendale, Mesa,
Scottsdale, Tempe, Town of
Youngtown, and Salt River
Project Agricultural
Improvement and Power
District, dated April 23, 1973
10.78 Agreement for the Sale and 10.4 to A PS' 1991 Form 10-K 1-4473 3-19-92
purchase of Wastewater Report
Effluent with City of Tolleson
and Salt River Agricultural
Improvement and Power
District, dated June 12, 1981,
including Amendment No. 1
dated as of November 12,
1981 and Amendment No. 2
dated as of June 4, 1986
10.79a First Amendment to 10.2 to the Company's 1995 1-8962 4-1-96
Employment Agreement, Form 10-K Report
effective March 31, 1995,
between Richard Snell and
the Company
10.80a Second Amendment to 10.2 to the Company's 1996 1-8962 3-31-97
Employment Agreement, Form 10-K Report
effective February 5, 1997,
between Richard Snell and
the Company
10.81a APS Director Equity Plan 10.1 to September 1997 Form 1-4473 11-12-97
10-Q Report
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.1 Collateral Trust Indenture 4.2 to APS' 1992 Form 10 K 1-4473 3-30-93
among PVNGS II Funding Report
Corp., Inc., APS and
Chemical Bank, as Trustee
99.2 Supplemental Indenture to 4.3 to APS' 1992 Form 10 K 1-4473 3-30-93
Collateral Trust Indenture Report
among PVNGS II Funding
Corp., Inc., APS and
Chemical Bank, as Trustee
99.3c Participation Agreement, 28.1 to APS' September 1992 1-4473 11-9-92
dated as of August 1, 1986, Form 10-Q Report
among PVNGS Funding
Corp., Inc., Bank of America
National Trust and Savings
Association, State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, in
its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual
capacity and as Indenture
Trustee, APS, and the Equity
Participant named therein
99.4c Amendment No. 1 dated as of 10.8 to APS' September 1986 1-4473 12-4-86
November 1, 1986, to Form 10-Q Report by means of
Participation Agreement, Amendment No. 1, on
dated as of August 1, 1986, December 3, 1986 Form 8
among PVNGS Funding
Corp., Inc., Bank of America
National Trust and Savings
Association, State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, in
its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual
capacity and as Indenture
Trustee, APS, and the Equity
Participant named therein
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.5c Amendment No. 2, dated as 28.4 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Participation Agreement,
dated as of August 1, 1986,
among PVNGS Funding
Corp., Inc., PVNGS II
Funding Corp., Inc., State
Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its individual
capacity and as Owner
Trustee, Chemical Bank, in
its individual capacity and as
Indenture Trustee, APS, and
the Equity Participant named
therein
99.6c Trust Indenture, Mortgage, 4.5 to APS' Form S-3 33-9480 10-24-86
Security Agreement and Registration Statement
Assignment of Facility Lease,
dated as of August 1, 1986,
between State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
99.7c Supplemental Indenture No. 10.6 to APS' September 1986 1-4473 12-4-86
1, dated as of November 1, Form 10-Q Report by means of
1986 to Trust Indenture, Amendment No. 1 on December
Mortgage, Security 3, 1986 Form 8
Agreement and Assignment
of Facility Lease, dated as of
August 1, 1986, between
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, as Owner Trustee,
and Chemical Bank, as
Indenture Trustee
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.8c Supplemental Indenture No. 2 28.14 to APS' 1992 Form 10-K 1-4473 3-30-93
to Trust Indenture, Mortgage, Report
Security Agreement and
Assignment of Facility Lease,
dated as of August 1, 1986,
between State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Lease Indenture
Trustee
99.9c Assignment, Assumption and 28.3 to APS' Form S-3 33-9480 10-24-86
Further Agreement, dated as Registration Statement
of August 1, 1986, between
APS and State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.10c Amendment No. 1, dated as 10.10 to APS' September 1986 1-4473 12-4-86
of November 1, 1986, to Form 10-Q Report by means of
Assignment, Assumption and Amendment No. l on December
Further Agreement, dated as 3, 1986 Form 8
of August 1, 1986, between
APS and State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.11c Amendment No. 2, dated as 28.6 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Assignment, Assumption and
Further Agreement, dated as
of August 1, 1986, between
APS and State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.12 Participation Agreement, 28.2 to APS' September 1992 1-4473 11-9-92
dated as of December 15, Form 10-Q Report
1986, among PVNGS
Funding Report Corp., Inc.,
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its individual
capacity and as Owner
Trustee, Chemical Bank, in
its individual capacity and as
Indenture Trustee under a
Trust Indenture, APS, and the
Owner Participant named
therein
99.13 Amendment No. 1, dated as 28.20 to APS' Form S-3 1-4473 8-10-87
of August 1, 1987, to Registration Statement No.
Participation Agreement, 33-9480 by means of a
dated as of December 15, November 6, 1986 Form 8-K
1986, among PVNGS Report
Funding Corp., Inc. as
Funding Corporation, State
Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, as Owner Trustee,
Chemical Bank, as Indenture
Trustee, APS, and the Owner
Participant named therein
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.14 Amendment No. 2, dated as 28.5 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Participation Agreement,
dated as of December 15,
1986, among PVNGS
Funding Corp., Inc., PVNGS
II Funding Corp., Inc., State
Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its individual
capacity and as Owner
Trustee, Chemical Bank, in
its individual capacity and as
Indenture Trustee, APS, and
the Owner Participant named
therein
99.15 Trust Indenture, Mortgage, 10.2 to APS' November 18, 1-4473 1-20-87
Security Agreement and 1986 Form 10-K Report
Assignment of Facility Lease,
dated as of December 15,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
99.16 Supplemental Indenture No. 4.13 to APS' Form S-3 1-4473 8-24-87
1, dated as of August 1, 1987, Registration Statement No.
to Trust Indenture, Mortgage, 33-9480 by means of August 1,
Security Agreement and 1987 Form 8-K Report
Assignment of Facility Lease,
dated as of December 15,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.17 Supplemental Indenture No. 2 4.5 to APS' 1992 Form 10-K 1-4473 3-30-93
to Trust Indenture Mortgage, Report
Security Agreement and
Assignment of Facility Lease,
dated as of December 15,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Lease Indenture
Trustee
99.18 Assignment, Assumption and 10 5 to APS' November 18, 1-4473 1-20-87
Further Agreement, dated as 1986 Form 8-K Report
of December 15, 1986,
between APS and State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.19 Amendment No. 1, dated as 28.7 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Assignment, Assumption and
Further Agreement, dated as
of December 15, 1986,
between APS and State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.20c Indemnity Agreement dated 28.3 to APS' 1992 Form 10-K 1-4473 3-30-93
as of March 17, 1993 by APS Report
99.21 Extension Letter, dated as of 28.20 to APS' Form S-3 1-4473 8-10-87
August 13, 1987, from the Registration Statement No.
signatories of the 33-9480 by means of a
Participation Agreement to November 6, 1986 Form 8-K
Chemical Bank Report
99.22 Arizona Corporation 28.1 to APS' 1991 Form 10-K 1-4473 3-19-92
Commission Order dated Report
December 6, 1991
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.23 Arizona Corporation 10.1 to APS' June 1994 form 1-4473 8-12-94
Commission Order dated 10-Q Report
June 1, 1994
99.24 Rate Reduction Agreement 10.1 to APS' December 4, 1995 1-4473 12-14-95
dated December 4, 1995 8-K Report
between APS and the ACC
Staff
99.25 ACC Order dated April 24, 10.1 to APS' March 1996 Form 1-4473 5-14-96
1996 10-Q Report
99.26 Arizona Corporation 99.1 to APS' 1996 Form 10-K 1-4473 3-28-97
Commission Order, Decision Report
No. 59943, dated December
26, 1996, including the Rules
regarding the introduction of
retail competition in Arizona
</TABLE>
- ---------------
(a)Management contract or compensatory plan or arrangement to be filed as
an exhibit pursuant to Item 14(c) of Form 10-K.
(b)Reports filed under File No. 1-4473 and 1-8962 were filed in the office
of the Securities and Exchange Commission located in Washington, D.C.
(c)An additional document, substantially identical in all material respects
to this Exhibit, has been entered into, relating to an additional Equity
Participant. Although such additional document may differ in other respects
(such as dollar amounts, percentages, tax indemnity matters, and dates of
execution), there are no material details in which such document differs from
this Exhibit.
(d)Additional agreements, substantially identical in all material respects
to this Exhibit have been entered into with additional persons. Although such
additional documents may differ in other respects (such as dollar amounts and
dates of execution), there are no material details in which such agreements
differ from this Exhibit.
Reports on Form 8-K
During the quarter ended December 31, 1997, and the period ended March 23,
1998, the Company did not file any Reports on Form 8-K.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PINNACLE WEST CAPITAL CORPORATION
(Registrant)
Date: March 31, 1998 /s/ Richard Snell
----------------------------------------
(Richard Snell, Chairman of the Board of
Directors and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard Snell Principal Executive Officer March 31, 1998
- -------------------------------------------------- and Director
(Richard Snell, Chairman of the Board of
Directors and Chief Executive Officer)
/s/ William J. Post President and Director March 31, 1998
- --------------------------------------------------
(William J. Post)
Principal Financial Officer, March 31, 1998
/s/ George A. Schreiber, Jr. Principal Accounting Officer,
- -------------------------------------------------- Executive Vice President and
(George A. Schreiber, Jr.) Director
/s/ Pamela Grant Director March 31, 1998
- --------------------------------------------------
(Pamela Grant)
/s/ Roy A. Herberger, Jr. Director March 31, 1998
- --------------------------------------------------
(Roy A. Herberger, Jr.)
/s/ Martha O. Hesse Director March 31, 1998
- --------------------------------------------------
(Martha O. Hesse)
/s/ William S. Jamieson, Jr. Director March 31, 1998
- --------------------------------------------------
(William S. Jamieson, Jr.)
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John R. Norton, III Director March 31, 1998
- --------------------------------------------------
(John R. Norton, III)
/s/ Humberto S. Lopez Director March 31, 1998
- --------------------------------------------------
(Humberto S. Lopez)
/s/ Douglas J. Wall Director March 31, 1998
- --------------------------------------------------
(Douglas J. Wall)
</TABLE>
74
Exhibit 10.1a
Summary of the Pinnacle West Capital Corporation 1998 Bonus Plan
Under the Pinnacle West Capital Corporation 1998 Bonus Plan, upon the
recommendation of the Human Resources Committee, the Board establishes on an
annual basis certain financial and other goals to be met, designating parameters
of performance and assigning relative weights. The principal measures of
performance during 1998 include per-share earnings and the development and
implementation of long-term strategies for the Company and its subsidiaries.
EXHIBIT 21
SUBSIDIARIES OF PINNACLE WEST CAPITAL CORPORATION
Arizona Public Service Company
State of Incorporation: Arizona
Axiom Power Solutions, Inc.
State of Incorporation: Arizona
Bixco, Inc.
State of Incorporation: Arizona
SunCor Development Company
State of Incorporation: Arizona
SunCor Resort & Golf Management, Inc.
State of Incorporation: Arizona
Litchfield Park Service Company
State of Incorporation: Arizona
Golden Heritage Homes, Inc.
State of Incorporation: Arizona
Golden Heritage Construction, Inc.
State of Incorporation: Arizona
Golf de Mexico, S.A. DE C.V.
Incorporation: Tijuana, Baja California, Mexico
SunCor Realty & Management Company
State of Incorporation: Arizona
Palm Valley Golf Club, Inc.
State of Incorporation: Arizona
Rancho Viejo de Santa Fe, Inc.
State of Incorporation: New Mexico
Ranchland Utility Company
State of Incorporation: New Mexico
<PAGE>
El Dorado Investment Company
State of Incorporation: Arizona
SCM, Inc.
State of Incorporation: Arizona
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Post-Effective
Amendment No. 2 to Registration Statement No. 33-15190 on Form S-3, Registration
Statement Nos. 33-39208, 33-47534, 33-54287, 33-54307, 33-58372 and 333-30819 on
Form S-8, Post-Effective Amendment No. 1 to Registration Statement No. 33-1720
on Form S-8, Post-Effective Amendment No. 2 to Registration Statement No.
33-10442 on Form S-8, and Post-Effective Amendment No. 3 on Form S-3 to
Registration Statement No. 2-96386 on Form S-14, all of Pinnacle West Capital
Corporation, of our report dated March 4, 1998 appearing in this Annual Report
on Form 10-K of Pinnacle West Capital Corporation for the year ended December
31, 1997.
Deloitte & Touche LLP
Phoenix, Arizona
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,677,568
<OTHER-PROPERTY-AND-INVEST> 580,948
<TOTAL-CURRENT-ASSETS> 449,100
<TOTAL-DEFERRED-CHARGES> 1,142,801
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<COMMON> 1,553,771
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 473,665
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,027,436
29,110
142,051
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0
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<OPERATING-INCOME-LOSS> 557,506
<OTHER-INCOME-NET> (171,369)
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<NET-INCOME> 235,856
0
<EARNINGS-AVAILABLE-FOR-COMM> 235,856
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<TOTAL-INTEREST-ON-BONDS> 126,426
<CASH-FLOW-OPERATIONS> 637,579
<EPS-PRIMARY> 2.76
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</TABLE>
