FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8962
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PINNACLE WEST CAPITAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0512431
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 E. Van Buren St., P.O. Box 52132, Phoenix, Arizona 85072-2132
- ------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 379-2500
-------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of common stock, no par value,
outstanding as of August 12, 1998: 84,740,070
<PAGE>
Glossary
--------
ACC - Arizona Corporation Commission
ACC Staff - Staff of the Arizona Corporation Commission
APS - Arizona Public Service Company
Company - Pinnacle West Capital Corporation
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
EPA - United States Environmental Protection Agency
FERC - Federal Energy Regulatory Commission
ITC - Investment tax credit
1997 10-K - Pinnacle West Capital Corporation Annual Report on Form 10-K for the
fiscal year ended December 31, 1997
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
Power Coordination Agreement - 1955 agreement between the Company and Salt River
Project that provides for certain electric system and power sales
SFAS No. 71 - Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation"
SFAS No. 128 - Statement of Financial Accounting Standards No. 128, "Earnings
Per Share"
SFAS No. 131 - Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information"
SFAS No. 133 - Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities"
Salt River Project - Salt River Project Agricultural Improvement and Power
District
SunCor - SunCor Development Company
<PAGE>
Territorial Agreement - 1955 agreement between APS and Salt River Project that
has provided exclusive retail service territories in Arizona as against each
other
<PAGE>
-2-
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
- -----------------------------
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
June 30,
1998 1997
------------ ------------
Operating Revenues
Electric $ 441,715 $ 458,751
Real estate 28,916 30,166
------------ ------------
Total 470,631 488,917
------------ ------------
Fuel Expenses
Fuel for electric generation 50,434 55,626
Purchased power 45,151 43,684
------------ ------------
Total 95,585 99,310
------------ ------------
Operating Expenses
Utility operations and maintenance 102,713 89,162
Real estate operations 26,213 28,301
Depreciation and amortization 93,585 91,809
Taxes other than income taxes 29,930 30,311
------------ ------------
Total 252,441 239,583
------------ ------------
Operating Income 122,605 150,024
------------ ------------
Other Income (Deductions)
Interest on long-term debt (38,067) (41,232)
Other interest (4,374) (5,973)
Capitalized interest 4,874 5,339
Preferred stock dividend requirements of APS (2,435) (3,195)
Other - net 192 4,823
------------ ------------
Total (39,810) (40,238)
------------ ------------
Income Before Income Tax 82,795 109,786
Income Tax Expense 33,798 42,604
============ ============
Net Income $ 48,997 $ 67,182
============ ============
Average Common Shares Outstanding 84,810,790 85,155,688
Earnings Per Average Common Share Outstanding:
Net income - basic $ 0.58 $ 0.79
Net income - diluted $ 0.57 $ 0.78
Dividends Declared Per Share $ 0.600 $ 0.550
============ ============
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(Dollars in thousands, except per share amounts)
Six Months Ended
June 30,
1998 1997
------------ ------------
Operating Revenues
Electric $ 822,138 $ 837,772
Real estate 63,077 49,709
------------ ------------
Total 885,215 887,481
------------ ------------
Fuel Expenses
Fuel for electric generation 100,762 106,748
Purchased power 68,740 78,031
------------ ------------
Total 169,502 184,779
------------ ------------
Operating Expenses
Utility operations and maintenance 199,129 177,178
Real estate operations 56,449 48,063
Depreciation and amortization 186,415 184,411
Taxes other than income taxes 60,278 60,555
------------ ------------
Total 502,271 470,207
------------ ------------
Operating Income 213,442 232,495
------------ ------------
Other Income (Deductions)
Interest on long-term debt (78,282) (81,520)
Other interest (7,081) (10,474)
Capitalized interest 9,530 10,010
Preferred stock dividend requirements of APS (5,313) (6,821)
Other - net 4,551 9,046
------------ ------------
Total (76,595) (79,759)
------------ ------------
Income Before Income Tax 136,847 152,736
Income Tax Expense 56,764 60,172
============ ============
Net Income $ 80,083 $ 92,564
============ ============
Average Common Shares Outstanding 84,798,120 86,280,924
Earnings Per Average Common Share Outstanding:
Net Income - Basic $ 0.94 $ 1.07
Net Income - Diluted $ 0.94 $ 1.07
Dividends Declared Per Share $ 0.900 $ 0.825
============ ============
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve Months Ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Operating Revenues
Electric $ 1,862,919 $ 1,784,125
Real estate 129,841 107,053
------------ ------------
Total 1,992,760 1,891,178
------------ ------------
Fuel Expenses
Fuel for electric generation 195,355 237,518
Purchased power 225,995 136,757
------------ ------------
Total 421,350 374,275
------------ ------------
Operating Expenses
Utility operations and maintenance 421,385 419,853
Real estate operations 120,014 100,790
Depreciation and amortization 370,289 365,641
Taxes other than income taxes 121,269 112,921
------------ ------------
Total 1,032,957 999,205
------------ ------------
Operating Income 538,453 517,698
------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction -- 1,531
Interest on long-term debt (160,927) (164,502)
Other interest (15,280) (23,191)
Capitalized interest 19,223 16,226
Preferred stock dividend requirements of APS (11,295) (15,110)
Other - net 74 1,611
------------ ------------
Total (168,205) (183,435)
------------ ------------
Income From Continuing Operations Before Income Tax 370,248 334,263
Income Tax Expense 146,873 126,953
------------ ------------
Income From Continuing Operations 223,375 207,310
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 $9,667 -- (14,272)
============ ============
Net Income $ 223,375 $ 183,499
============ ============
Average Common Shares Outstanding 84,767,601 86,869,084
Earnings Per Average Common Share Outstanding:
Continuing Operations - Basic $ 2.64 $ 2.38
Net Income - Basic $ 2.64 $ 2.11
Continuing Operations - Diluted $ 2.62 $ 2.37
Net Income - Diluted $ 2.62 $ 2.10
Dividends Declared Per Share $ 1.200 $ 1.100
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
ASSETS
------
(Thousands of Dollars)
June 30, December 31,
1998 1997
---------- ----------
Current Assets
Cash and cash equivalents $ 31,641 $ 27,484
Customer and other receivables - net 170,963 183,507
Accrued utility revenues 66,922 58,559
Material and supplies 71,207 70,634
Fossil fuel 17,960 9,621
Deferred income taxes 35,401 57,887
Other current assets 46,722 41,408
---------- ----------
Total current assets 440,816 449,100
---------- ----------
Investments and Other Assets
Real estate investments - net 349,951 365,921
Other assets 226,171 215,027
---------- ----------
Total investments and other assets 576,122 580,948
---------- ----------
Utility Plant
Electric plant in service and held for future use 7,057,168 7,009,059
Less accumulated depreciation and
amortization 2,720,762 2,620,607
---------- ----------
Total 4,336,406 4,388,452
Construction work in progress 294,978 237,492
Nuclear fuel, net of amortization 51,165 51,624
---------- ----------
Net utility plant 4,682,549 4,677,568
---------- ----------
Deferred Debits
Regulatory asset for income taxes 430,601 458,369
Rate synchronization cost deferrals 331,265 358,871
Other deferred debits 310,516 325,561
---------- ----------
Total deferred debits 1,072,382 1,142,801
---------- ----------
Total Assets $6,771,869 $6,850,417
========== ==========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
LIABILITIES AND EQUITY
----------------------
(Thousands of Dollars)
June 30, December 31,
1998 1997
---------- ----------
Current Liabilities
Accounts payable $ 106,327 $ 117,429
Accrued taxes 76,863 84,610
Accrued interest 32,625 32,974
Dividends payable 25,445 --
Short-term borrowings 213,485 130,750
Current maturities of long-term debt 158,077 108,695
Customer deposits 31,024 30,672
Other current liabilities 22,896 18,534
---------- ----------
Total current liabilities 666,742 523,664
---------- ----------
Long-Term Debt Less Current Maturities 2,075,107 2,244,248
---------- ----------
Deferred Credits and Other
Deferred income taxes 1,343,658 1,363,461
Deferred investment tax credit 42,966 50,861
Unamortized gain - sale of utility plant 80,075 82,363
Other 392,386 387,223
---------- ----------
Total deferred credits and other 1,859,085 1,883,908
---------- ----------
Commitments and Contingencies (Notes 5, 8 and 9)
Minority Interests
Non-redeemable preferred stock of APS 124,034 142,051
---------- ----------
Redeemable preferred stock of APS 15,377 29,110
---------- ----------
Common Stock Equity
Common stock, no par value 1,554,097 1,553,771
Retained earnings 477,427 473,665
---------- ----------
Total common stock equity 2,031,524 2,027,436
---------- ----------
Total Liabilities and Equity $6,771,869 $6,850,417
========== ==========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-7-
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(THOUSANDS OF DOLLARS)
Six Months Ended
June 30,
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 80,083 $ 92,564
Items not requiring cash
Depreciation and amortization 203,388 200,991
Deferred income taxes - net 5,645 (24,844)
Deferred investment tax credit (7,895) (7,870)
Other - net 389 (10,123)
Changes in current assets and liabilities
Customer and other receivables - net 12,544 (2,296)
Accrued utility revenues (8,363) (14,047)
Materials, supplies and fossil fuel (8,912) 1,153
Other current assets (5,314) (4,222)
Accounts payable (12,438) (39,477)
Accrued taxes (8,081) 33,387
Accrued interest (349) (5,181)
Other current liabilities 5,339 (10,838)
Decrease in land held 15,084 6,189
Other - net 4,686 29,820
--------- ---------
Net Cash Flow Provided By Operating Activities 275,806 245,206
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (144,580) (145,203)
Capitalized interest (9,530) (8,394)
Other - net 3,435 (2,389)
--------- ---------
Net Cash Flow Used For Investing Activities (150,675) (155,986)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 99,375 102,382
Short-term borrowings - net 82,735 211,100
Dividends paid on common stock (50,878) (47,441)
Repayment of long-term debt (220,782) (230,823)
Redemption of preferred stock (31,209) (46,044)
Repurchase and retirement of common stock -- (79,863)
Other - net (215) (176)
--------- ---------
Net Cash Flow Used For Financing Activities (120,974) (90,865)
--------- ---------
Net Cash Flow 4,157 (1,645)
Cash and Cash Equivalents at Beginning of Period 27,484 26,686
========= =========
Cash and Cash Equivalents at End of Period $ 31,641 $ 25,041
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 72,863 $ 83,351
Income taxes $ 64,820 $ 56,090
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-8-
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements include the accounts of
Pinnacle West and its subsidiaries: APS, SunCor and El Dorado. All significant
intercompany balances have been eliminated. Certain prior year balances have
been restated to conform to the current year presentation.
2. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position of
Pinnacle West and its subsidiaries as of June 30, 1998, the results of
operations for the three months, six months and twelve months ended June 30,
1998 and 1997, and the cash flows for the six months ended June 30, 1998 and
1997. It is suggested that these condensed consolidated financial statements and
notes to condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and notes to consolidated financial
statements included in the 1997 10-K.
3. The operations of APS are subject to seasonal fluctuations, with variations
in energy usage by customers occurring from season to season and from month to
month within a season, primarily as a result of changing weather conditions. For
this and other reasons, the results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for
changes in capitalization for the six months ended June 30, 1998.
5. Regulatory Matters --- Electric Industry Restructuring
State
ACC Rules. In December 1996, the ACC adopted rules that provide a framework for
the introduction of retail electric competition in Arizona. On August 5, 1998,
the ACC adopted amendments to the rules. The ACC rules, as amended, include the
following major provisions:
o The rules apply to virtually all of the Arizona electric utilities
regulated by the ACC, including APS.
o The rules require each affected utility, including APS, 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, and 100% no later than January 1, 2001.
o All affected utility customers with single premise loads of one
megawatt
<PAGE>
-9-
or greater will be eligible for competitive electric services beginning
January 1, 1999, until the 20% level described in the preceding
paragraph is met. Until the 20% level is met, affected utility
customers with single premise loads of forty kilowatts or greater will
be able to aggregate into a combined load of one megawatt or greater to
be eligible for competitive electric services beginning January 1,
1999.
o Prior to January 1, 2001, residential customers will have access to
competitive services through a quarterly phase-in of one-half percent
of residential customers per quarter beginning January 1, 1999.
o Electric service providers that obtain Certificates of Convenience and
Necessity (CC&Ns) from the ACC will be allowed to supply, market,
and/or broker specified electric services at retail. These services
include electric generation, but exclude electric transmission and
distribution.
o As required by the rules, in February 1998 APS filed with the ACC
proposed tariffs for unbundled service (electric service elements
provided and priced seperately). The ACC has not issued a decision in
this matter.
o The rules establish that the ACC shall allow a reasonable opportunity
for the recovery of unmitigated stranded costs. See "Stranded Costs"
below. Affected utilities are expected to take reasonable,
cost-effective steps to mitigate stranded costs.
o Absent a waiver from the ACC, each affected utility must separate
itself from all competitive generation assets and services prior to
January 1, 2001. The separation must be either to an unaffiliated party
or to a separate corporate affiliate or affiliates.
o Beginning January 1, 1999, each affected utility will be prohibited
from providing certain competitive electric services, except through a
separate affiliate.
o The rules contain affiliate transaction rules generally prohibiting an
affected utility and its competitive electric affiliates from sharing
personnel, office space, equipment, services, and systems, except to
the extent appropriate to perform certain permissible shared corporate
support functions. No later than December 31, 1998, each affected
utility must file a compliance plan with the ACC demonstrating its
compliance with the affiliate transaction rules.
o By September 15, 1998, each affected utility must file a report
detailing possible mechanisms to provide benefits, such as rate
reductions of 3% to 5%, to all standard offer customers and a proposed
plan for residential phase-in implementation.
The amended rules, a copy of which has been filed as an exhibit to this Report
on Form
<PAGE>
-10-
10-Q, became effective on an emergency basis upon their filing with the
Secretary of State on August 10, 1998; however, the ACC must complete a public
process to adopt the rules on a permanent basis within 180 days. The Company
anticipates the completion of this process by year-end 1998 or early 1999.
The Company believes that certain provisions of the ACC 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 partially decided in a manner adverse to those utilities'
positions.
Stranded Costs. In February 1998, the ACC completed a formal, generic hearing on
stranded cost determination and recovery. On June 22, 1998, the ACC issued an
order in this matter. The order allows an affected utility, such as APS, to
choose between two options for the recovery of its stranded costs. Under the
first option, an affected utility that chooses to divest its generating assets
to an unaffiliated party must file a divestiture plan for ACC approval no later
than October 1, 1998, and such divestiture must be completed by January 1, 2001,
after which the affected utility would be permitted to collect 100 percent of
its stranded costs, including a return on the unamortized balance, over a
ten-year period. Under the second option (referred to by the ACC as the
"Transition Revenues Methodology"), an affected utility would be provided
sufficient revenues necessary to maintain financial integrity for a period of
ten years or the ACC would "otherwise provide an allocation of stranded cost
responsibilities and risks between ratepayers and shareholders as is determined
to be in the public interest." The order also states an intent that the various
recovery options "will provide the affected utilities sufficient revenues to
enable them to recover appropriate regulatory assets." The order requires each
affected utility to file with the ACC, on or before August 21, 1998, its choice
of options for stranded cost recovery as well as an implementation plan relating
to its chosen option, including its estimated stranded costs separated out into
regulatory assets and other generation related assets. Stranded costs estimates
vary depending on various assumptions, estimates, methodologies and measurement
periods. Based on various assumptions, estimates and methodologies, APS has
previously estimated that its recoverable stranded costs (excluding regulatory
assets which have already been addressed in the 1996 regulatory agreement with
the ACC) would be less than $500 million, assuming a measurement period 2001
through 2006.
APS intends to use the Transitional Revenues Methodology and does not intend to
divest its generating assets to an unaffiliated party. The Company cannot
accurately predict the outcome of this matter.
Legislative Initiatives. 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
<PAGE>
-11-
market forces. This latter issue (the ability of the ACC to set rates based on
the competitive market) has been subsequently decided in favor of the ACC in one
unrelated and two related lawsuits.
In May 1998, a bill was enacted to facilitate implementation of retail electric
competition in the state. The bill includes the following major provisions: (a)
requirements that Arizona's largest government-operated electric utility (Salt
River Project) and, at their option, smaller city electric systems (i) open
their service territories to electric service providers to implement retail
electric generation competition for 20% of each utility's 1995 retail peak
demand by December 31, 1998 and for all retail customers by December 31, 2000;
(ii) decrease rates by at least 10% over a ten-year period beginning as early as
January 1, 1991; (iii) implement procedures and public processes, including
judicial review at the request of either an interested party or the Arizona
Attorney General, for establishing the terms, conditions and pricing of electric
services as well as certain other decisions affecting retail electric
competition, which procedures and processes are comparable to those already
applicable to public service corporations; (b) a description of the factors
which form the basis of consideration by Salt River Project in determining
stranded costs; and (c) a requirement that metering and meter reading services
be provided on a competitive basis during the first two years of competition
only for customers having demands in excess of one megawatt (and that are
eligible for competitive generation services), and thereafter for all customers
receiving competitive electric generation. In addition, the Arizona legislature
will review and make recommendations for the 1999 legislature on certain
competitive issues.
Federal
The Energy Policy Act of 1992 and recent rulemakings by FERC have promoted
increased competition in the wholesale electric power markets. The Company does
not expect these rules to have a material impact on its financial statements.
Several electric utility reform bills have been introduced during recent
congressional sessions, which as currently written, would allow consumers to
choose their electricity suppliers by 2000 or 2003. These bills, other bills
that are expected to be introduced, and ongoing discussions at the federal level
suggest a wide range of opinion that will need to be narrowed before any
substantial restructuring of the electric utility industry can occur.
Regulatory Accounting
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' existing regulatory orders and current regulatory
environment support its accounting practices related to regulatory assets, which
amounted to approximately $0.9 billion at June 30, 1998. In accordance with the
1996 regulatory agreement, the ACC accelerated
<PAGE>
-12-
the amortization of substantially all of APS' regulatory assets to an eight-year
period that began July 1, 1996.
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.
General
Changes in ACC decisions, Arizona and federal legislation, and possible
amendments to the Arizona Constitution may impact the implementation of retail
electric competition in Arizona. Until the details of implementation of
competition, including addressing stranded costs, are 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 APS to compete in the new regulatory
environment.
6. Regulatory Matters --- 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).
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%.
<PAGE>
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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 price reduction of approximately $17 million ($10
million after income taxes), or 1.1%, to become effective July 1, 1998. The
amount and timing of the price decrease are subject to ACC approval.
7. Agreement with Salt River Project
On April 25, 1998, APS and Salt River Project entered into a Memorandum of
Agreement in anticipation of, and to facilitate, the opening of the Arizona
electric industry. The Agreement contains the following major components:
o APS and Salt River Project would amend the Territorial Agreement to
remove any barriers to the provision of competitive electricity supply
and non-distribution services.
o APS and Salt River Project would amend the Power Coordination Agreement
to lower the price that APS will pay Salt River Project for purchased
power by approximately $17 million (pretax) in 1999 and by lesser
annual amounts through 2006.
o APS and Salt River Project agreed on certain legislative positions
regarding electric utility restructuring at the state and federal
level.
An ACC docket had previously been established and the ACC held a hearing on
August 6, 1998 so that the ACC could review certain provisions of the Memorandum
of Agreement, as amended, including, whether: (a) the Territorial Agreement
remains in the public interest, (b) the Agreement is a contract in restraint of
trade, and (c) the Agreement will materially lessen the potential for retail
electric competition in Arizona.
The Antitrust Unit of the Arizona Attorney General's Office, which has been
involved in the ongoing regulatory and legislative proceedings regarding the
restructuring of the Arizona electric industry, requested clarification of the
operation of certain of the Agreement's provisions. Pursuant to an Addendum to
Memorandum of Agreement, dated as of May 19, 1998 (the "Addendum"), APS and Salt
River Project amended and clarified certain provisions of the Memorandum of
Agreement in response to certain issues raised by the Antitrust Unit. By letter
dated May 19, 1998, the Antitrust Unit advised APS and Salt River Project that,
upon their execution of the Addendum, it would take no action regarding the
language of the Memorandum of Agreement,
<PAGE>
-14-
although it reserved the right to take action in the future if new information
justified doing so.
8. The Palo Verde participants have insurance for public liability payments
resulting from nuclear energy hazards to the full limit of liability under
federal law. This potential liability is covered by primary liability insurance
provided by commercial insurance carriers in the amount of $200 million and the
balance by an industry-wide retrospective assessment program. If losses at any
nuclear power plant covered by 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 $88
million, subject to an annual limit of $10 million per incident. Based upon APS'
29.1% interest in the three Palo Verde units, APS' maximum potential assessment
per incident is approximately $77 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.
9. APS has encountered tube cracking in the Palo Verde steam generators and has
taken, and will continue to take, remedial actions that it believes have slowed
the rate of tube degradation. The projected service life of the steam generators
is reassessed periodically and these analyses indicate that it will be
economically desirable for APS to replace the Unit 2 steam generators between
2003 and 2008. APS estimates that its share of the replacement costs (in 1998
dollars) 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.
10. The Financial Accounting Standards Board issued SFAS No. 131 on "Disclosures
about Segments of an Enterprise and Related Information" which is effective for
fiscal years beginning after December 15, 1997. 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.
<PAGE>
-15-
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for the Company in 2000. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The standard also provides specific
guidance for accounting for derivatives designated as hedging instruments. The
Company is currently evaluating what impact this standard will have on its
financial statements.
11. 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):
Twelve Months Ended
June 30,
Basic EPS: 1998 1997
- ---------- ---- ----
Continuing operations $2.64 $2.38
Discontinued operations -- (0.11)
Extraordinary charge -- (0.16)
----- -----
Net Income $2.64 $2.11
===== =====
Diluted EPS
Continuing operations $2.62 $2.37
Discontinued operations -- (0.11)
Extraordinary charge -- (0.16)
---- -----
Net Income $2.62 $2.10
===== =====
Dilutive stock options increased average common shares outstanding by 605,279
and 449,369 for the three-month period ended June 30, 1998 and 1997
respectively; 577,489 and 497,751 for the six-month period ended June 30, 1998
and 1997 respectively; and 530,970 and 568,532 for the twelve-month period ended
June 30, 1998 and 1997 respectively, but had no effect on net income. Total
average common shares outstanding for the purposes of calculating diluted
earnings per share were 85,416,069 and 85,605,057 for the three-month period
ended June 30, 1998 and 1997 respectively; 85,375,609 and 86,778,675 for the
six-month period ended June 30, 1998 and 1997 respectively; and 85,298,570 and
87,437,615 for the twelve-month period ended June 30, 1998 and 1997
respectively.
<PAGE>
-16-
PINNACLE WEST CAPITAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------
of Operations.
- --------------
Operating Results
- -----------------
The following table shows the income and/or loss of Pinnacle West and its
subsidiaries for the three-month, six-month and twelve-month periods ended June
30, 1998 and 1997:
Income (Loss)
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30, June 30, June 30,
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
APS $ 49,749 $ 66,298 $ 78,806 $ 91,317 $ 226,179 $ 210,453
SunCor 2,046 1,167 5,285 2,255 8,364 7,501
El Dorado 1,038 3,686 4,207 6,956 5,441 7,366
Pinnacle West (1) (3,836) (3,969) (8,215) (7,964) (16,609) (41,821)
-------- -------- -------- -------- --------- ---------
Net Income $ 48,997 $ 67,182 $ 80,083 $ 92,564 $ 223,375 $ 183,499
======== ======== ======== ======== ========= =========
</TABLE>
(1) Includes Pinnacle West's interest expense, extraordinary charge for early
retirement of debt, discontinued operations and operating expenses net of income
tax benefits. Income tax benefit (expenses) are as follows (in thousands):
$(539) and $822 for the three months ended June 30, 1998 and 1997, respectively;
$(1,460) and $1,208 for the six months ended June 30, 1998 and 1997,
respectively; and $82 and $17,678 for the twelve months ended June 30, 1998 and
1997, respectively.
APS
---
Operating Results - Three-month period ended June 30, 1998 compared
-----------------------------------------------------------------------
with three-month period ended June 30, 1997
-------------------------------------------
Earnings decreased $17 million in the three-month comparison primarily
because of the effects of weather, increased operations and maintenance
expenses, and a retail price reduction, partially offset by customer growth and
lower fuel expenses. See Note 6 of Notes to Condensed Consolidated Financial
Statements for information on the price reduction.
<PAGE>
-17-
Operating revenues decreased $17 million because of weather effects
($41 million) and the price reduction ($4 million), partially offset by the
effects of customer growth ($17 million), increased sales for resale ($8
million) and other ($3 million). 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 changes in power marketing
activity, which can vary from period to period without corresponding effects on
earnings because of related fluctuations in purchased power costs.
Operations and maintenance expenses increased $14 million as a result
of the timing of scheduled outages at power plants and other miscellaneous
expenses.
Fuel expenses decreased $4 million primarily because of lower fuel
prices and lower retail sales, partially offset by higher sales for resale.
Operating Results - Six-month period ended June 30, 1998 compared with
-----------------------------------------------------------------------
six-month period ended June 30, 1997
------------------------------------
Earnings decreased $13 million in the six-month comparison primarily
because of the effects of weather, increased operations and maintenance
expenses, and a retail price reduction, partially offset by customer growth and
lower fuel expenses. See Note 6 of Notes to Condensed Consolidated Financial
Statements for additional information about the price reduction.
Operating revenues decreased $16 million because of weather effects
($38 million) and the price reduction ($8 million), partially offset by the
effects of customer growth ($29 million). Operations and maintenance expenses
increased $22 million as a result of growth and increased expenses due to
impending competition, the timing of scheduled outages at power plants and other
miscellaneous factors.
Fuel expenses decreased $15 million primarily because of lower prices
and a more favorable mix.
Operating Results - Twelve-month period ended June 30, 1998 compared
-----------------------------------------------------------------------
with twelve-month period ended June 30, 1997
--------------------------------------------
Earnings increased $16 million in the twelve-month comparison primarily
because of customer growth; two fuel-related settlements in the third quarter of
1997; and lower fuel prices. These positive factors more than offset the effects
of weather and a retail price reduction. See Note 6 of Notes to Condensed
Consolidated Financial Statements for additional information about the price
reduction. In the period ended June 30, 1997, APS also recognized $8 million of
income tax benefits associated with capital loss carryforwards.
<PAGE>
-18-
Operating revenues increased $79 million primarily because of increases
in sales for resale ($80 million) and customer growth ($57 million), partially
offset by the effects of weather ($37 million) and the price reduction ($18
million). 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 changes in power marketing activity, which can vary from period to
period without corresponding effects on earnings because of related fluctuations
in purchased power costs.
The two fuel-related settlements increased APS' pretax earnings by
approximately $21 million. The Company's consolidated income statement reflects
these settlements as reductions in fuel expense and as other income.
Operations and maintenance expenses increased $2 million because higher
expenses related to growth and impending competition, the timing of scheduled
outages at power plants and other miscellaneous factors more than offset the
effects of a charge for a voluntary severance program recorded in 1996 and
related savings in 1997.
Non-Utility Operations
----------------------
The parent company's losses decreased in the twelve-month period due to
lower interest expense resulting from debt reduction. The twelve-month period
ended June 30, 1997 includes extraordinary charges related to the early
retirement of debt and a loss from discontinued operations on a legal matter
related to MeraBank, A Federal Savings Bank (a former subsidiary).
SunCor's earnings increased in all periods because of an increase in net land
and home sales.
El Dorado's decreased earnings are the result of investment sales in periods
ended 1997.
Investment Tax Credit Amortization
----------------------------------
As part of a 1994 rate settlement with the ACC, the Company accelerated
amortization of substantially all deferred 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.
<PAGE>
-19-
Liquidity and Capital Resources
- -------------------------------
Parent Company
--------------
The parent company's cash requirements and its ability to fund those
requirements are discussed under "Capital Needs and Resources" in Management's
Discussion and Analysis of Financial Condition and Results of Operation in Part
II, Item 7 of the 1997 10-K.
During the six-months ended June 30, 1998, the parent company redeemed
approximately $54 million of its long-term debt with cash from operations and
short-term borrowings.
As a result of the 1996 regulatory agreement (see Note 6 of Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this report),
the parent company has invested $50 million in APS in 1996 and 1997 and will
invest similar amounts annually in 1998 and 1999.
The Board declared a quarterly dividend of 30 cents per share of common
stock, payable September 1, 1998 to shareholders of record on August 1, 1998,
totaling approximately $ 25.4 million.
APS
---
For the six months ended June 30, 1998, APS incurred approximately $145
million in capital expenditures, which is approximately 45% of the most recently
estimated 1998 capital expenditures. APS' projected capital expenditures for the
next three years are: 1998, $323 million; 1999, $322 million; and 2000, $317
million, respectively. These amounts include about $30 - $35 million each year
for nuclear fuel expenditures. In addition, APS is considering expanding certain
of its businesses over the next several years, which may result in increased
expenditures.
APS' long-term debt and preferred stock redemption requirements and
payment obligations on a capitalized lease for the next three years are: 1998,
$176 million; 1999, $174 million; and 2000, $109 million. During the six months
ended June 30, 1998, APS redeemed approximately $142 million of its long-term
debt and approximately $31 million of its preferred stock with cash from
operations and long-term and short-term debt. As a result of the 1996 regulatory
agreement (see Note 6 of Notes to Condensed Consolidated Financial Statements),
the parent company invested $50 million in APS in 1996 and 1997 and will invest
similar amounts annually in 1998 and 1999.
Although provisions in APS' bond indenture, articles of incorporation,
and financing orders from the ACC establish maximum amounts of additional first
mortgage
<PAGE>
-20-
bonds and preferred stock that APS may issue, management does not expect any of
these restrictions to limit APS' ability to meet its capital requirements.
Year 2000 Issue
- ---------------
As the year 2000 approaches many companies face problems because many
software application and operational programs will not properly recognize
calendar dates beginning with the year 2000. The Company and its subsidiaries
are addressing the Year 2000 issue as described below.
APS
---
APS initiated a comprehensive company-wide Year 2000 program over a year
ago to review and resolve all Year 2000 issues in critical systems and equipment
in a timely manner in an effort to ensure the reliability of electric service to
its customers. This included a company-wide awareness program of the Year 2000
issue.
APS believes that substantially all of its major information technology
(IT) systems are Year 2000 compliant. APS has made, and will continue to make,
certain modifications to its computer hardware and software systems and
applications in an effort to ensure they are capable of handling changing
business needs, including dates in the year 2000 and thereafter. In addition,
other IT systems and non-IT systems, including embedded technology and real-time
process control systems, are being analyzed for potential modifications. To
date, APS has inventoried essentially all critical IT and non-IT systems and the
assessment of these systems is ongoing. The analysis of the IT and non-IT
systems should be complete in late 1998 and any renovation, validation and
implementation to be made will be completed by mid-1999 for all critical systems
that effect operations, except for those items that can only be completed during
maintenance outages at Palo Verde, which will be completed during the last half
of 1999. APS has also designated an internal audit/quality review team that is
reviewing the individual Year 2000 projects and their Year 2000 readiness on a
quarterly basis. The cost to APS of Year 2000 remediation has not had, and is
not expected to have, a material adverse effect on APS' financial position, cash
flows, or results of operations.
APS is in the process of communicating with its significant suppliers,
business partners, other utilities 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. APS has been interfacing with suppliers for
systems, services and materials in order to assess whether their schedules for
analysis and remediation of Year 2000 issues are timely and to assess their
ability to continue to supply services and materials required by APS. However,
APS cannot currently predict the effect on APS if the systems of these other
companies are not Year 2000 compliant.
<PAGE>
-21-
Parent Company and Non-Utility Subsidiaries
-------------------------------------------
The parent company, SunCor, and El Dorado have made, and will continue
to make, certain modifications to their respective computer hardware and
software systems and applications in an effort to ensure they are capable of
handling dates in the year 2000 and thereafter. The cost to the parent company,
SunCor and El Dorado of Year 2000 remediation has not had, and is not expected
to have, a material adverse effect on the Company's financial position, cash
flows, or results of operations.
Competition and Electric Industry Restructuring
- -----------------------------------------------
See Note 5 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for discussions of competitive developments and
regulatory accounting. See Note 7 of Notes to Condensed Consolidated Financial
Statements in Part I, Item 1 of this report for a discussion of a proposed
amendment to a Power Coordination Agreement with Salt River Project that APS
estimates would reduce its pretax costs for purchased power by approximately $17
million in 1999 and by lesser annual amounts through 2006.
Rate Matters
- ------------
See Note 6 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for a discussion of a proposed price reduction.
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 Year 2000 issues.
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.
<PAGE>
-22-
PART II - OTHER INFORMATION
---------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
At the Company's Annual Meeting of Shareholders held on May 20, 1998,
the following persons were elected Class I Directors with a term to expire at
the 2001 annual meeting:
Abstentions
Votes Votes and Broker
For Against Non Votes
--- ------- ---------
Roy A. Herberger, Jr. 78,660,794 890,545 N/A
George A. Schreiber, Jr. 78,708,165 843,174 N/A
Humberto S. Lopez 78,641,695 909,644 N/A
The following information relates primarily to Pinnacle West and its principal
subsidiary APS.
ITEM 5. Other Information
- -------------------------
EPA Environmental Regulation
----------------------------
As previously reported, the EPA has been considering the Grand Canyon
Visability Transport Commission's recommendations prior to promulgating final
regulations on a regional haze regulatory program and final regulations were
expected by June 1998. See "Environmental Matters - EPA Environmental
Regulation" in Part I, Item 1 of the 1997 10-K. These final regulations are now
expected by December 1998. 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.
As previously reported, in July 1997, the EPA promulgated final National
Ambient Air Quality Standards for ozone and particulate matter. See
"Environmental Matters - EPA Environmental Regulation" in Part I, Item 1 of the
1997 10-K. Congress recently enacted legislation that could delay the
implementation of the regional haze requirements and particulate matter ambient
standard.
<PAGE>
-23-
Spent Nuclear Fuel and Waste Disposal
-------------------------------------
As previously reported, in November 1997, the D.C. Circuit issued a
Writ of Mandamus precluding DOE from excusing its delay in accepting spent
nuclear fuel by January 31, 1998. See "Generating Fuel and Purchased Power -
Nuclear Fuel Supply - Spent Nuclear Fuel and Waste Disposal" in Part I, Item 1
of the 1997 10-K. On May 5, 1998, the D.C. Circuit issued a ruling refusing to
order DOE to begin moving spent nuclear fuel. On July 24, 1998, APS filed a
Petition for Review with the D.C. Circuit regarding DOE's obligation to begin
accepting spent nuclear fuel. Arizona Public Service Company v. Department of
------------------------------------------------
Energy and United States of America, No. 98-1346 (D.C. Cir.).
- ------------------------------------
Palo Verde Nuclear Generating Station
-------------------------------------
See Note 9 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for a discussion of issues regarding the Palo
Verde steam generators.
Construction and Financing Programs
-----------------------------------
See "Liquidity and Capital Resources" in Part I, Item 2 of this report
for a discussion of the Company's construction and financing programs.
Competition and Electric Industry Restructuring
-----------------------------------------------
See Note 5 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for a discussion of competition and the rules
regarding the introduction of retail electric competition in Arizona. On
February 28, 1997, a lawsuit was filed by APS to protect its legal rights
regarding the rules and in its complaint APS asked the Court for (i) a judgment
vacating the retail electric competition rules, (ii) a declaratory judgment that
the rules are unlawful because, among other things, they were entered into
without proper legal authorization, and (iii) a permanent injunction barring the
ACC from enforcing or implementing the rules and from promulgating any other
regulations without lawful authority.
ITEM 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
Exhibit No. Description
- ----------- -----------
27.1 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
section 229.10(d) by reference to the filings set forth below:
<PAGE>
-24-
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.a Date Effective
<S> <C>
10.1 Retail Electric Competition 10.1 to APS' June 30, 1998 1-4473 8-14-98
Rules Form 10-Q Report
10.2 Arizona Corporation Commission 99.1 to APS' 1996 Form 10-K 1-4473 3-28-97
Order, Decision No. 59943, Report
Dated December 26, 1996, including
the rules regarding the introduction
of retail competition in Arizona
10.3 Articles of Incorporation, 19.1 to the Company's September 1-8962 11-14-88
restated as of July 29, 1988 30, 1988 Form 10-Q Report
10.4 Bylaws, amended as of 3.1 to the Company's 1995 Form 1-8962 4-1-96
February 21, 1996 10-K Report
(b) Reports on Form 8-K
During the quarter ended June 30, 1998, and the period from July 1 through August 14, 1998, the Company
filed the following reports on Form 8-K:
Report dated August 5, 1998 regarding the ACC rules related to retail competition.
</TABLE>
- --------
a
Reports filed under File No. 1-4473 were filed in the office of the Securities
and Exchange Commission located in Washington, D.C.
<PAGE>
-25-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PINNACLE WEST CAPITAL CORPORATION
(Registrant)
Dated: August 14, 1998 By: George A. Schreiber, Jr.
---------------------------------
George A. Schreiber, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Officer Duly Authorized
to sign this Report)
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,682,549
<OTHER-PROPERTY-AND-INVEST> 576,122
<TOTAL-CURRENT-ASSETS> 440,816
<TOTAL-DEFERRED-CHARGES> 1,072,382
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,771,869
<COMMON> 1,554,097
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 477,427
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,031,524
15,377
124,034
<LONG-TERM-DEBT-NET> 2,075,107
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 213,485
<LONG-TERM-DEBT-CURRENT-PORT> 158,077
0
<CAPITAL-LEASE-OBLIGATIONS> 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,154,265
<TOT-CAPITALIZATION-AND-LIAB> 6,771,869
<GROSS-OPERATING-REVENUE> 885,215
<INCOME-TAX-EXPENSE> 56,764
<OTHER-OPERATING-EXPENSES> 502,271
<TOTAL-OPERATING-EXPENSES> 671,773
<OPERATING-INCOME-LOSS> 213,442
<OTHER-INCOME-NET> (76,595)
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 75,833
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0
<EARNINGS-AVAILABLE-FOR-COMM> 80,083
<COMMON-STOCK-DIVIDENDS> 50,878
<TOTAL-INTEREST-ON-BONDS> 58,953
<CASH-FLOW-OPERATIONS> 275,806
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.94
</TABLE>
