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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-8962
PINNACLE WEST CAPITAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0512431
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 E. Van Buren St., P.O. Box 52132, Phoenix, Arizona 85072-2132
- ------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 379-2500
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of common stock, no par value,
outstanding as of August 12, 1999: 84,764,309
<PAGE>
Glossary
ACC - Arizona Corporation Commission
ACC Staff - Staff of the Arizona Corporation Commission
APS - Arizona Public Service Company
APS Energy Services - APS Energy Services Company, Inc., a direct access
electricity provider
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 - Environmental Protection Agency
FASB - Financial Accounting Standards Board
FERC - Federal Energy Regulatory Commission
ITC - Investment tax credit
March 10-Q - Pinnacle West Capital Corporation Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 1999
1998 10-K - Pinnacle West Capital Corporation Annual Report on Form 10-K for the
fiscal year ended December 31, 1998
MW - Megawatt, one million watts
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"
<PAGE>
-2-
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
Territorial Agreement - 1955 agreement between the Company and Salt River
Project that has provided exclusive retail service territories in Arizona for
each party
<PAGE>
-3-
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,
----------------------------
1999 1998
------------ ------------
Operating Revenues
Electric $ 511,434 $ 441,715
Real estate 32,697 28,916
------------ ------------
Total 544,131 470,631
------------ ------------
Operating Expenses
Fuel and purchased power 132,543 95,585
Utility operations and maintenance 106,234 102,713
Real estate operations 29,401 26,213
Depreciation and amortization 97,383 93,585
Taxes other than income taxes 29,602 29,930
------------ ------------
Total 395,163 348,026
------------ ------------
Operating Income 148,968 122,605
------------ ------------
Other Income (Expense)
Preferred stock dividend requirements of APS -- (2,435)
Net other income and expense 399 192
------------ ------------
Total 399 (2,243)
------------ ------------
Income Before Interest and Income Taxes 149,367 120,362
------------ ------------
Interest Expense
Interest charges 41,105 42,441
Capitalized interest (4,189) (4,874)
------------ ------------
Total 36,916 37,567
------------ ------------
Income Before Income Taxes 112,451 82,795
Income Taxes 43,749 33,798
------------ ------------
Net Income $ 68,702 $ 48,997
============ ============
Average Common Shares Outstanding - Basic 84,716,175 84,810,790
Average Common Shares Outstanding - Diluted 85,093,421 85,416,069
Earnings Per Average Common Share Outstanding
Net income - basic $ 0.81 $ 0.58
Net income - diluted $ 0.81 $ 0.57
Dividends Declared Per Share $ 0.65 $ 0.60
============ ============
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-4-
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Six Months Ended
June 30,
----------------------------
1999 1998
------------ ------------
Operating Revenues
Electric $ 925,417 $ 822,138
Real estate 57,230 63,077
------------ ------------
Total 982,647 885,215
------------ ------------
Operating Expenses
Fuel and purchased power 231,784 169,502
Utility operations and maintenance 205,318 199,129
Real estate operations 51,636 56,449
Depreciation and amortization 194,293 186,415
Taxes other than income taxes 59,049 60,278
------------ ------------
Total 742,080 671,773
------------ ------------
Operating Income 240,567 213,442
------------ ------------
Other Income (Expense)
Preferred stock dividend requirements of APS (1,016) (5,313)
Net other income and expense (1,938) 4,551
------------ ------------
Total (2,954) (762)
------------ ------------
Income Before Interest and Income Taxes 237,613 212,680
------------ ------------
Interest Expense
Interest charges 81,874 85,363
Capitalized interest (8,263) (9,530)
------------ ------------
Total 73,611 75,833
------------ ------------
Income Before Income Taxes 164,002 136,847
Income Taxes 64,610 56,764
------------ ------------
Net Income $ 99,392 $ 80,083
============ ============
Average Common Shares Outstanding - Basic 84,693,115 84,798,120
Average Common Shares Outstanding - Diluted 85,135,423 85,375,609
Earnings Per Average Common Share Outstanding
Net income - basic $ 1.17 $ 0.94
Net income - diluted $ 1.17 $ 0.94
Dividends Declared Per Share $ 0.975 $ 0.90
============ ============
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-5-
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Twelve Months Ended
June 30,
----------------------------
1999 1998
------------ ------------
Operating Revenues
Electric $ 2,109,677 $ 1,862,919
Real estate 118,341 129,841
------------ ------------
Total 2,228,018 1,992,760
------------ ------------
Operating Expenses
Fuel and purchased power 599,783 421,350
Utility operations and maintenance 420,230 421,385
Real estate operations 110,518 120,014
Depreciation and amortization 387,557 370,289
Taxes other than income taxes 115,677 121,269
------------ ------------
Total 1,633,765 1,454,307
------------ ------------
Operating Income 594,253 538,453
------------ ------------
Other Income (Expense)
Preferred stock dividend requirements of APS (5,406) (11,295)
Net other income and expense (5,880) 74
------------ ------------
Total (11,286) (11,221)
------------ ------------
Income Before Interest and Income Taxes 582,967 527,232
------------ ------------
Interest Expense
Interest charges 165,656 176,207
Capitalized interest (17,329) (19,223)
------------ ------------
Total 148,327 156,984
------------ ------------
Income Before Income Taxes 434,640 370,248
Income Taxes 172,439 146,873
------------ ------------
Net Income $ 262,201 $ 223,375
============ ============
Average Common Shares Outstanding - Basic 84,722,147 84,767,601
Average Common Shares Outstanding - Diluted 85,232,428 85,298,571
Earnings Per Average Common Share Outstanding
Net income - basic $ 3.09 $ 2.64
Net income - diluted $ 3.08 $ 2.62
Dividends Declared Per Share $ 1.30 $ 1.20
============ ============
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-6-
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands of Dollars)
June 30, December 31,
1999 1998
(Unaudited)
---------- ----------
Current Assets
Cash and cash equivalents $ 32,511 $ 20,538
Customer and other receivables--net 185,701 233,876
Accrued utility revenues 98,046 67,740
Materials and supplies 70,919 69,074
Fossil fuel 17,786 13,978
Deferred income taxes 4,058 3,999
Other current assets 55,923 47,594
---------- ----------
Total current assets 464,944 456,799
---------- ----------
Investments and Other Assets
Real estate investments--net 335,977 331,021
Other assets 262,586 236,562
---------- ----------
Total investments and other assets 598,563 567,583
---------- ----------
Utility Plant
Electric plant in service and held for future use 7,370,852 7,265,604
Less accumulated depreciation and amortization 2,941,878 2,814,762
---------- ----------
Total 4,428,974 4,450,842
Construction work in progress 247,910 228,643
Nuclear fuel, net of amortization 50,446 51,078
---------- ----------
Net utility plant 4,727,330 4,730,563
---------- ----------
Deferred Debits
Regulatory asset for income taxes 373,417 400,795
Rate synchronization cost deferral 276,055 303,660
Other deferred debits 363,912 365,146
---------- ----------
Total deferred debits 1,013,384 1,069,601
---------- ----------
Total Assets $6,804,221 $6,824,546
========== ==========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-7-
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITY
(Thousands of Dollars)
June 30, December 31,
1999 1998
(Unaudited)
---------- ----------
Current Liabilities
Accounts payable $ 127,791 $ 155,800
Accrued taxes 158,195 62,520
Accrued interest 32,972 31,866
Dividends payable 27,552 --
Short-term borrowings 223,950 178,830
Current maturities of long-term debt 17,810 168,045
Customer deposits 25,943 28,510
Other current liabilities 5,806 14,632
---------- ----------
Total current liabilities 620,019 640,203
---------- ----------
Long-Term Debt Less Current Maturities 2,164,459 2,048,961
---------- ----------
Deferred Credits and Other
Deferred income taxes 1,319,340 1,343,536
Deferred investment tax credit 19,672 27,345
Unamortized gain - sale of utility plant 75,499 77,787
Other 435,351 428,122
---------- ----------
Total deferred credits and other 1,849,862 1,876,790
---------- ----------
Commitments and contingencies (Notes 5, 6, 9 and 10)
Minority Interests
Non-redeemable preferred stock of APS -- 85,840
---------- ----------
Redeemable preferred stock of APS -- 9,401
---------- ----------
Common Stock Equity
Common stock, no par value 1,540,437 1,550,643
Retained earnings 629,444 612,708
---------- ----------
Total common stock equity 2,169,881 2,163,351
---------- ----------
Total Liabilities and Equity $6,804,221 $6,824,546
========== ==========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-8-
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(THOUSANDS OF DOLLARS)
Six Months Ended
June 30,
----------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 99,392 $ 80,083
Items not requiring cash
Depreciation and amortization 194,293 186,415
Nuclear fuel amortization 15,673 16,580
Deferred income taxes--net (21,477) 5,645
Deferred investment tax credit (7,673) (7,895)
Other--net 1,096 782
Changes in current assets and liabilities
Customer and other receivables--net 48,175 12,544
Accrued utility revenues (30,306) (8,363)
Materials, supplies and fossil fuel (5,653) (8,912)
Other current assets (8,329) (5,314)
Accounts payable (25,465) (12,438)
Accrued taxes 95,675 (8,081)
Accrued interest 1,106 (349)
Other current liabilities (5,307) 5,339
Decrease (increase) in land held (4,642) 15,084
Other--net (16,382) (7,364)
--------- ---------
Net Cash Flow Provided By Operating Activities 330,176 263,756
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (153,730) (144,580)
Capitalized interest (8,263) (9,530)
Other--net 1,282 15,485
--------- ---------
Net Cash Flow Used For Investing Activities (160,711) (138,625)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 193,691 99,375
Short-term borrowings--net 45,120 82,735
Dividends paid on common stock (55,101) (50,878)
Repayment of long-term debt (235,755) (220,782)
Redemption of preferred stock (96,499) (31,209)
Other--net (8,948) (215)
--------- ---------
Net Cash Flow Used For Financing Activities (157,492) (120,974)
--------- ---------
Net Cash Flow 11,973 4,157
Cash and Cash Equivalents at Beginning of Period 20,538 27,484
========= =========
Cash and Cash Equivalents at End of Period $ 32,511 $ 31,641
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 68,341 $ 72,863
Income taxes $ 940 $ 64,820
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-9-
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, El Dorado, and APS Energy
Services. All significant intercompany balances have been eliminated. We have
reclassified certain prior year amounts to conform to the current year
presentation.
2. Our unaudited condensed consolidated financial statements reflect all
adjustments which we believe are necessary for the fair presentation of our
financial position and results of operations for the periods presented. These
adjustments are of a normal recurring nature. We suggest that these condensed
consolidated financial statements and notes to condensed consolidated financial
statements be read along with the consolidated financial statements and notes to
consolidated financial statements included in our 1998 10-K.
3. Weather conditions can have a significant impact on APS' results for interim
periods. For this and other reasons, results for interim periods do not
necessarily represent results to be expected for the 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, 1999.
5. Regulatory Accounting
APS prepares its financial statements in accordance with 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 the current regulatory environment support its
accounting practices related to regulatory assets, which amounted to about $850
million at June 30, 1999. Under the 1996 regulatory agreement (see Note 7), the
ACC accelerated the amortization of substantially all of APS' regulatory assets
to an eight-year period that will end June 30, 2004.
During 1997, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) issued EITF 97-4. EITF 97-4 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.
<PAGE>
-10-
Although rules have been proposed for the transition of generation services to
competition, there are many unresolved issues. APS continues to apply SFAS No.
71 to its generation 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. See Note 6 for a discussion of a proposed settlement agreement which,
if approved, would result in the discontinuation of SFAS No. 71 for generation
operations.
6. Regulatory Matters -- Electric Industry Restructuring
STATE
PROPOSED SETTLEMENT AGREEMENT As of May 14, 1999, APS entered into a
comprehensive Settlement Agreement with various other parties, including
representatives of major consumer groups, related to the implementation of
retail electric competition. Hearings before the ACC on the Settlement Agreement
ended in July 1999, and a final ACC order, which is a condition to the
agreement's effectiveness, has not yet been issued. By the terms of the
Settlement Agreement, unless ACC approval has been obtained on or before August
1, 1999, each party has the right to unilaterally withdraw from the Settlement
Agreement. To date, no party has elected to withdraw.
The following are the major provisions of the Settlement Agreement:
* APS will reduce rates for standard offer service for customers with loads
less than 3 megawatts in a series of annual rate reductions of 1.5%
beginning July 1, 1999 through July 1, 2003, for a total of 7.5%. The first
reduction includes the July 1, 1999 retail price decrease related to the
1996 regulatory agreement. See Note 7. For customers having loads 3
megawatts or greater, standard offer rates will be reduced in annual
increments that total 5% through 2002.
* Unbundled rates being charged by APS for competitive direct access service
(for example, distribution services) will become effective as of July 1,
1999, and will be subject to annual reductions, that vary by rate class,
through 2003.
* There will be a moratorium on retail rate changes for standard offer and
unbundled competitive direct access rates until July 1, 2004, except for
the price reductions described above and certain other limited
circumstances.
* APS will be permitted to defer for later recovery prudent and reasonable
costs of complying with the ACC electric competition rules, system benefits
costs in excess of the levels included in current rates, and costs
associated with APS' "provider of last resort" and standard offer
obligations for service after July 1, 2004. These costs are to be recovered
through an adjustment clause or clauses commencing on July 1, 2004.
<PAGE>
-11-
* APS' distribution system will be open for retail access upon approval of
the Settlement Agreement. Customers will be eligible for retail access in
accordance with the phase-in program expected to be ultimately adopted by
the ACC under the electric competition rules when such rules become
effective, with an additional 140 megawatts being made available to
eligible non-residential customers. Unless subject to judicial or
regulatory restraint, APS will open its distribution system to retail
access for all customers on January 1, 2001.
* APS is currently recovering substantially all of its regulatory assets
through July 1, 2004, pursuant to the 1996 regulatory agreement. See Note
7. In addition, the Settlement Agreement states that APS has demonstrated
that its allowable stranded costs, after mitigation and exclusive of
regulatory assets, are at least $533 million net present value. APS will
not be allowed to recover $183 million net present value of the above
amounts. The Settlement Agreement provides that APS will have the
opportunity to recover $350 million net present value through a competitive
transition charge (CTC) that will remain in effect through December 31,
2004, at which time it will terminate. Any over/under-recovery will be
credited/debited against the costs subject to recovery under the adjustment
clause described above.
* APS will form a separate corporate affiliate or affiliates and transfer
thereto its generating assets and competitive services by December 31,
2002.
* Upon final approval of the Settlement Agreement by the ACC in an order no
longer subject to judicial review, APS will move to dismiss all of its
litigation pending against the ACC as of the date of the Settlement
Agreement.
Upon final ACC order, APS will discontinue the application of Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," for its generation operations. This means that regulatory
assets, unless reestablished as recoverable through ongoing regulated cash
flows, are to be eliminated and the generation assets must be tested for
impairment. The regulatory disallowance, which removes $234 million pre-tax
($183 million net present value) from ongoing regulatory cash flows, will be
recorded as a net reduction of regulatory assets. This reduction will be
reported as an extraordinary charge on the income statement. The regulatory
assets to be recovered under this Settlement Agreement would be amortized as
follows:
(Millions)
1/1 - 6/30
1999 2000 2001 2002 2003 2004 Total
- -------- -------- -------- -------- -------- -------- --------
$164 $158 $145 $115 $86 $18 $686
<PAGE>
-12-
PROPOSED RETAIL ELECTRIC COMPETITION RULES In December 1996, the ACC
adopted rules that provide a framework for the introduction of retail electric
competition in Arizona. The ACC adopted certain modifications to these rules on
August 10, 1998, and on December 11, 1998, the ACC adopted the amended rules,
without any modifications that would have a significant impact on APS, on a
permanent basis. We believe that certain provisions of the 1996 ACC rules and
the amended rules are deficient and APS has filed lawsuits to protect its legal
rights regarding the 1996 rules and the amended rules. These lawsuits are
pending but two related cases filed by other utilities have been partially
decided in a manner adverse to those utilities' positions.
On January 11, 1999, the ACC issued an order which stayed the amended rules,
granted reconsideration of the decision to make the rules permanent, and
directed the hearing division of the ACC to establish a procedural order for
further action on these rules. The order also granted waivers from compliance
with the rules for APS, and all affected utilities.
On February 5, 1999, the ACC Hearing Division issued recommendations for changes
to the amended rules. The recommended changes to the amended rules were further
modified by a Procedural Order of the ACC Hearing Division dated March 12, 1999.
On April 14, 1999, the ACC voted to notice, for further rulemaking, the Hearing
Division's recommended changes, with certain exceptions (the "Proposed Rules").
The Proposed Rules approved by the ACC for further rulemaking include the
following major provisions:
* They would apply to virtually all Arizona electric utilities regulated by
the ACC, including APS.
* The Proposed Rules require each affected utility, including APS, to make
available at least 20% of its 1995 system retail peak demand for
competitive generation supply beginning when the ACC makes a final decision
on each utility's stranded costs and unbundled rates (Final Decision Date)
or January 1, 2001, whichever is earlier, and 100% beginning January 1,
2001.
* Subject to the 20% requirement, all utility customers with single premise
loads of one megawatt or greater will be eligible for competitive electric
services on the Final Decision Date. Customers with single premise loads of
40 kilowatts or greater may aggregate loads to meet this one megawatt
requirement.
* When effective, residential customers will be phased in at 1 1/4% per
quarter calculated beginning on January 1, 1999, subject to the 20%
requirement above.
* Electric service providers that get Certificates of Convenience and
Necessity (CC&Ns) from the ACC can supply only competitive services,
including electric generation, but not electric transmission and
distribution.
<PAGE>
-13-
* Affected utilities must file ACC tariffs with separate pricing for electric
services provided for noncompetitive services.
* The ACC shall allow a reasonable opportunity for recovery of unmitigated
stranded costs (see "Stranded Costs" below).
* Absent an ACC waiver, prior to January 1, 2001, each affected utility must
transfer all competitive generation assets and services either to an
unaffiliated party or to a separate corporate affiliate.
The Proposed Rules will not become final and effective until approved by the ACC
following formal rulemaking proceedings under Arizona law. In compliance with
statutory procedural requirements, ACC oral proceedings on the matter were held
in June 1999, and a final order has not yet been issued.
We cannot currently predict when or if the Proposed Rules will become effective,
when or if the stay of the amended rules will be lifted, or when retail electric
competition will be introduced in Arizona. See "Proposed Settlement Agreement"
above for discussion of APS' proposals regarding the introduction of retail
electric competition in Arizona.
STRANDED COSTS On June 22, 1998, the ACC issued an Order on stranded cost
determination and recovery. APS believes that certain provisions of the stranded
cost order are deficient and in August 1998, APS filed two lawsuits to protect
its legal rights relating to the order.
On February 5, 1999, the ACC Hearing Division issued recommended changes to the
June 1998 stranded cost order. These recommended changes were further amended by
an ACC Procedural Order dated March 12, 1999. On April 14, 1999, the ACC voted
to adopt the Hearing Division's changes to the June 1998 stranded cost order.
The amended stranded cost order became effective on April 27, 1999, and allows
each affected utility to choose from any one of five options for the recovery of
stranded costs:
* Net Revenues Lost Methodology is the difference between generation revenues
under traditional regulation and generation revenues under competition.
This option provides for declining recovery percentages for stranded costs
over a five-year recovery period. Regulatory assets are to be fully
recovered under their presently authorized amortization schedule. In
accordance with a 1996 regulatory agreement, the ACC accelerated the
amortization of substantially all of APS' regulatory assets to an
eight-year period that ends June 30, 2004.
* Divestiture/Auction Methodology allows a utility to divest all or
substantially all of its generating assets, including regulatory assets
associated with generation, in order to collect 100 percent of the
difference between net sales price and book value of generating assets
divested over a ten-year period, with no return on the unamortized balance.
<PAGE>
-14-
* Financial Integrity Methodology allows a utility "sufficient revenues to
meet minimum financial ratios" for a period of ten years.
* Settlement Methodology allows a settlement to be agreed upon by the ACC and
a utility.
* Any combination of the above, if shown to be in the best interests of all
affected parties.
See "Proposed Settlement Agreement" above, for a discussion of the methodology
APS proposed.
LEGISLATIVE INITIATIVES An Arizona joint legislative committee studied
electric utility industry restructuring issues in 1996 and 1997. In conjunction
with that study, the 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. This latter
issue has been subsequently decided by lower courts in favor of the ACC in four
separate lawsuits, two of which are unrelated.
In May 1998, a law was enacted to facilitate implementation of retail electric
competition in Arizona. The law includes the following major provisions:
* Arizona's largest government-operated electric utility (Salt River Project)
and, at their option, smaller municipal electric systems must (i) make at
least 20% of their 1995 retail peak demand available to electric service
providers 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 comparable to those already applicable to public service
corporations for establishing the terms, conditions, and pricing of
electric services as well as certain other decisions affecting retail
electric competition;
* describes the factors which form the basis of consideration by Salt River
Project in determining stranded costs; and
* metering and meter reading services must 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 legislative session on certain competitive issues.
<PAGE>
-15-
GENERAL Until the manner of implementation of competition, including
addressing stranded costs, is determined, we cannot accurately predict the
impact of full retail competition on our financial position, cash flows, or
results of operation. As competition in the electric industry continues to
evolve, we will continue to evaluate strategies and alternatives that will
position us to compete in the new regulatory environment. See "Proposed
Settlement Agreement" above.
FEDERAL The Energy Policy Act of 1992 and recent rulemakings by FERC have
promoted increased competition in the wholesale electric power markets. APS does
not expect these rules to have a material impact on its financial statements.
Several electric utility industry restructuring bills have been introduced
during the 106th Congress. Several of these bills are written to allow consumers
to choose their electricity suppliers beginning in 2000 and beyond. 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.
7. 1996 Regulatory Agreement
In April 1996, the ACC approved a regulatory agreement between the ACC Staff and
APS. The major provisions of this agreement are:
* 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.
* Recovery of substantially all of APS' present regulatory assets through
accelerated amortization over an eight-year period that will end June 30,
2004, increasing annual amortization by approximately $120 million ($72
million after income taxes).
* A formula for sharing future cost savings between customers and
shareholders (price reduction formula), referencing a return on equity (as
defined) of 11.25%.
* A moratorium on filing for permanent rate changes prior to July 2, 1999,
except under the price reduction formula and under certain other limited
circumstances.
* Infusion of $200 million of common equity into APS by the parent company,
in annual payments of $50 million starting in 1996.
Based on the price reduction formula, the ACC approved retail price decreases of
approximately $17.6 million ($10.5 million after income taxes), or 1.2%,
effective July 1, 1997, and approximately $17 million ($10 million after income
taxes), or 1.1%, effective July 1, 1998. In May 1999, APS filed with the ACC for
another retail price decrease of approximately $10.8 million annually ($6.5
million after income taxes), which would become effective as of July 1, 1999.
The amount and timing of the price decrease are subject to ACC approval. This
will be the last price decrease under the 1996 regulatory
<PAGE>
-16-
agreement and will be included in the first rate reduction under the proposed
Settlement Agreement discussed in Note 6. See "Proposed Settlement Agreement"
above for a discussion of the price decrease.
8. Agreement with Salt River Project
On April 25, 1998, APS entered into a Memorandum of Agreement with Salt River
Project in anticipation of, and to facilitate, the opening of the Arizona
electric industry. The Agreement contains the following major components:
* Both parties amended the Territorial Agreement to remove any barriers in
that agreement to the provision of competitive electricity supply and
non-distribution services.
* Both parties 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) during the first full year that the
Agreement is effective and by lesser annual amounts during the next seven
years.
* Both parties agreed on certain legislative positions regarding electric
utility restructuring at the state and federal level.
Certain provisions of the Agreement (including those relating to the amendments
of the Territorial Agreement and the Power Coordination Agreement) are affected
by the timing of the introduction of competition. See Note 6. On February 18,
1999, the ACC approved the Agreement.
9. Nuclear Insurance
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
<PAGE>
-17-
insurance coverage discussed in this and the previous paragraph is subject to
certain policy conditions and exclusions.
10. Accounting Matters
In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that entities recognize all derivatives as either assets or liabilities
on 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 statement was to have been effective for us in 2000;
however, the FASB has moved the effective date to 2001. We are currently
evaluating what impact this standard will have on our financial statements.
11. Memorandum of Understanding with Calpine Corporation
On April 23, 1999, we entered into a memorandum of understanding with Calpine
Corporation, an independent power producer located in San Jose, California, for
a potential $220 million, 500 megawatt expansion at the site of APS' West
Phoenix Power Plant. We entered into a further memorandum of understanding with
Calpine dated as of August 4, 1999, relating to the timing of the definitive
agreements and the operation of the joint project. The joint project is the
second phase of a potential 750 megawatt expansion at West Phoenix, the first
phase of which includes the installation of a 120 megawatt combined cycle unit,
the cost of which is expected to be approximately $60 million, although that
amount is currently subject to negotiation. Assuming approvals are granted,
construction is scheduled to begin in mid-2000, with commercial operation of the
first phase in mid-2001 and the second phase in early 2002.
<PAGE>
-18-
PINNACLE WEST CAPITAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In this section, we explain our results of operations, general financial
condition, and outlook for Pinnacle West and our subsidiaries: APS, SunCor, El
Dorado, and APS Energy Services, including:
* the changes in our earnings for the periods presented
* the factors impacting our business, including competition and electric
industry restructuring
* the effects of regulatory agreements on our results
* our capital needs and resources and
* Year 2000 technology issues.
We suggest this section be read along with the 1998 10-K. Throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, we refer to specific "Notes" in the Notes to Condensed Consolidated
Financial Statements. These Notes add further details to the discussion.
OPERATING RESULTS
OPERATING RESULTS - THREE-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED WITH
THREE-MONTH PERIOD ENDED JUNE 30, 1998
Consolidated net income for the three months ended June 30, 1999 was $68.7
million compared with $49.0 million for the same period in the prior year. Net
income increased in the three-month comparison primarily because of higher
earnings at APS.
APS' earnings increased $19.8 million in the three-month comparison primarily
because of the effects of warmer weather, an increase in customers, and
increased contributions from power marketing and trading activities, partially
offset by a retail price reduction, and higher depreciation and amortization
expense. See Note 7 for information on the price reduction.
Electric operating revenues increased $70 million because of:
* increased power marketing and trading revenues ($36 million)
* the effects of warmer weather ($21 million) and
* increases in the number of customers ($17 million).
As mentioned above, these positive factors were partially offset by the effect
of a reduction in retail prices ($4 million).
<PAGE>
-19-
Power marketing and trading activities are predominantly short-term opportunity
wholesale sales. The increase in power marketing revenues resulted primarily
from increased activity in western bulk power markets. The increase in power
marketing and trading revenues was accompanied by increases in purchased power
expenses.
Fuel expenses increased $37 million primarily because of increased wholesale and
retail sales volume and higher purchased power prices.
Depreciation and amortization expense increased $4 million because APS had more
plant in service.
OPERATING RESULTS - SIX-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED WITH
SIX-MONTH PERIOD ENDED JUNE 30, 1998
Consolidated net income for the six months ended June 30, 1999 was $99.4 million
compared with $80.1 million for the same period in the prior year. Net income
increased in the six-month comparison primarily because of higher earnings at
APS, partially offset by lower earnings at El Dorado.
APS earnings increased $23.5 million in the six-month comparison primarily
because of an increase in customers, increased contributions from power
marketing and trading activities, and the effects of warmer weather, partially
offset by a retail price reduction, and higher depreciation and amortization
expense. See Note 7 for information on the price reduction.
Electric operating revenues increased $103 million because of:
* increased power marketing and trading revenues ($70 million)
* increases in the number of customers ($29 million)
* the effects of warmer weather ($10 million) and
* miscellaneous factors ($2 million).
As mentioned above, these positive factors were partially offset by the effect
of a reduction in retail prices ($8 million).
Power marketing and trading activities are predominantly short-term opportunity
wholesale sales. The increase in power marketing revenues resulted from
increased activity in western bulk power markets. The increase in power
marketing and trading revenues was accompanied by increases in purchased power
expenses.
Fuel expenses increased $62 million primarily because of increased wholesale and
retail sales volume and higher purchased power prices.
Depreciation and amortization expense increased $8 million because APS had more
plant in service.
El Dorado's earnings decreased $4 million because of investment sales in 1998.
<PAGE>
-20-
OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED WITH
TWELVE-MONTH PERIOD ENDED JUNE 30, 1998
Consolidated net income for the twelve months ended June 30, 1999 was $262.2
million compared with $223.4 million for the same period in the prior year. Net
income increased in the twelve-month comparison primarily because of higher
earnings at APS and lower financing costs at the parent, partially offset by
lower contributions to earnings by the other subsidiaries.
APS earnings increased $42.9 million in the twelve-month comparison primarily
because of an increase in customers, increased contributions from power
marketing and trading activities, the effects of warmer weather, and lower
financing costs. In the comparison, these positive factors more than offset the
effects of two fuel-related settlements recorded in the third quarter of 1997, a
retail price reduction that became effective July 1, 1998, and higher
depreciation and amortization expense. See Note 7 for additional information
about the price reduction.
Operating revenues increased $247 million primarily because of:
* increased power marketing and trading revenues ($164 million)
* increases in the number of customers and the average amount of
electricity used by customers ($79 million)
* the effects of warmer weather ($15 million) and
* miscellaneous factors ($7 million).
As mentioned above, these positive factors were partially offset by the effect
of a reduction in retail prices ($18 million).
Power marketing and trading activities are predominantly short-term opportunity
wholesale sales. The increase in power marketing revenues resulted from
increased activity in Western bulk power markets, higher prices, and increased
sales to large customers in California. The increase in power marketing and
trading revenues was accompanied by increases in purchased power expenses.
Fuel expense increased $178 million primarily because of increased wholesale and
retail sales volumes, the effects of two fuel-related settlements in the third
quarter of 1997, and higher purchased power prices. The settlements increased
pretax earnings in the twelve months ended June 30, 1998 by approximately $21
million. The income statement reflects these settlements as reductions in fuel
expense and as other income.
Depreciation and amortization expense increased $17 million because APS had more
plant in service.
APS decreased its financing costs by $10 million primarily because of lower
amounts of outstanding debt and preferred stock and lower interest rates.
<PAGE>
-21-
Parent company financing costs decreased $7 million as we paid down debt and
took advantage of lower interest rates.
El Dorado's earnings decreased $5 million in the twelve-month period because of
investment sales in 1998 and 1997.
APS Energy Services, which was incorporated in late 1998, reported a loss of $3
million for the twelve-month period.
OTHER INCOME
As part of a 1994 rate settlement with the ACC, APS 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. Beginning in 2000, no further benefits
will be reflected in income tax expense.
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 1998 10-K.
During the six-months ended June 30, 1999, the parent company redeemed
approximately $19 million of its long-term debt with cash from operations and
proceeds from long-term borrowings.
As a result of the 1996 regulatory agreement (see Note 7), the parent company
has invested $50 million in APS in 1996, 1997 and 1998 and will make the final
investment of $50 million in 1999.
On April 23, 1999, we entered into a memorandum of understanding with Calpine
Corporation, an independent power producer located in San Jose, California, for
a potential $220 million, 500 megawatt expansion at the site of APS' West
Phoenix Power Plant. We entered into a further memorandum of understanding with
Calpine dated as of August 4, 1999, relating to the timing of the definitive
agreements and the operation of the joint project. The joint project is the
second phase of a potential 750 megawatt expansion at West Phoenix, the first
phase of which includes the installation of a 120 megawatt combined cycle unit,
the cost of which is expected to be approximately $60 million, although that
amount is currently subject to negotiation. Assuming approvals are granted,
construction is scheduled to begin in mid-2000, with commercial operations of
the first phase in mid-2001 and of the second phase in early 2002. We are also
considering additional expansion over the next several years, which may result
in additional expenditures. We currently believe that there will be additional
<PAGE>
-22-
opportunities to expand our investment in generating assets in the next five
years. It is expected that these and other generating assets would be organized
in a non-regulated subsidiary under the parent company.
The Board declared a quarterly dividend of 32.5 cents per share of common stock,
payable September 1, 1999 to shareholders of record on August 2, 1999, totaling
approximately $27.6 million.
APS
For the six months ended June 30, 1999, APS incurred approximately $154 million
in capital expenditures, which is approximately 47% of the most recently
estimated 1999 capital expenditures. APS' projected capital expenditures for the
next three years are: 1999, $328 million; 2000, $353 million; and 2001, $343
million. These amounts include about $30 - $35 million each year for nuclear
fuel expenditures.
APS' long-term debt and preferred stock redemption requirements and payment
obligations on a capitalized lease for the next three years are: 1999, $387
million; 2000, $115 million; and 2001, $2 million. During the six months ended
June 30, 1999, APS redeemed approximately $216 million of its long-term debt and
all $96 million (including premiums) of its preferred stock with cash from
operations and long-term and short-term debt. In February 1999, APS issued $125
million of unsecured long-term debt. As a result of the 1996 regulatory
agreement (see Note 7), Pinnacle West invested $50 million in APS in 1996, 1997,
and 1998 and will make the final investment of $50 million in 1999.
Although provisions in APS' first mortgage bond indenture, articles of
incorporation, and ACC financing orders establish maximum amounts of additional
first mortgage bonds that we may issue, APS does not expect any of these
provisions to limit its ability to meet its capital requirements.
YEAR 2000 READINESS DISCLOSURE
OVERVIEW As the year 2000 approaches, many companies face problems because many
computer systems and equipment will not properly recognize calendar dates
beginning with the year 2000. We are addressing the Year 2000 issue as described
below. APS initiated a comprehensive company-wide Year 2000 program during 1997
to review and resolve all Year 2000 issues in mission critical systems (systems
and equipment that are key to the power production, delivery, health, and safety
functions) in a timely manner to ensure the reliability of electric service to
its customers. This included a company-wide awareness program of the Year 2000
issue. APS has an internal audit/quality review team that is periodically
reviewing the individual Year 2000 projects and their Year 2000 readiness.
<PAGE>
-23-
The following chart shows Year 2000 readiness of our mission critical systems as
of June 30, 1999:
Inventory Assessment Remediation & Testing
--------- ---------- ---------------------
APS 100% 100% 100%
Pinnacle West and
other subsidiaries
(excluding APS) 100% 100% 95%(1)
(1) Estimated to be at 100% by September 30, 1999.
DISCUSSION APS has been actively implementing and replacing systems and
technology since 1995 for general business reasons unrelated to the Year 2000,
and these actions have resulted in substantially all of its major information
technology (IT) systems becoming Year 2000 ready. The major IT systems that
were, and are being, implemented and replaced include the following:
* Work Management
* Materials Management
* Energy Management System
* Payroll
* Financial
* Human Resources
* Trouble Call Management System
* Computer and Communications Network Upgrades
* Geographic Information System
* Customer Information System and
* Palo Verde Site Work Management System.
We and our subsidiaries have made, and will continue to make, certain
modifications to computer hardware, software, and application systems, including
IT and non-IT systems, in an effort to ensure they are capable of handling
changing business needs, including dates in the year 2000 and thereafter. In
addition, other APS IT systems and non-IT systems, including embedded technology
and real-time process control systems, are being analyzed for potential
modifications.
Pinnacle West and its subsidiaries have inventoried and assessed essentially all
mission critical IT and non-IT systems and equipment. APS is 100% complete and
Pinnacle West and its other subsidiaries are 95% complete with the remediation
and testing of these systems. APS notified the North American Electric
Reliability Council (NERC) on June 30, 1999, that its mission critical systems
are ready for date changes associated with the Year 2000, in accordance with
NERC's recommended criteria. APS also notified the Nuclear Regulatory Commission
(NRC) that Palo Verde is "Y2K Ready," which means that Palo Verde has followed a
prescribed program to identify
<PAGE>
-24-
and resolve Year 2000 issues so that the plant can operate reliably while
meeting commitments.
As previously reported, APS expected remediation and testing to be completed by
June 30, 1999, for all mission critical systems, except for (i) Palo Verde Unit
1 systems and (ii) the continuous emissions monitoring systems (CEMS) for four
of its fossil plants. See "Year 2000 Readiness Disclosure" in Part I, Item 2 of
the March 10-Q. However, as of June 30, 1999, remediation and testing was
completed for all mission critical systems, including Palo Verde Unit 1, but
excluding CEMS, which have been removed from the mission critical systems list
because the failure of the system would not lead to an unplanned shutdown of
generation. This is based on NERC's June 14, 1999 clarifying pronouncement on
exception reporting. APS currently expects the CEMS for the four fossil plants
to be Y2K Ready no later than the fourth quarter 1999.
APS currently estimates that it will spend approximately $5 million relating to
Year 2000 issues, about $4.5 million of which has been spent to date. This
includes an estimated allocation of payroll costs for APS employees working on
Year 2000 issues, and costs for consultants, hardware, and software. We do not
separately track other internal costs. This does not include any expenditures
incurred since 1995 to implement and replace systems for reasons unrelated to
the Year 2000, as discussed above. Our cost to address the Year 2000 issue is
charged to operating expenses as incurred and has not had, and is not expected
to have, a material adverse effect on our financial position, cash flows, or
results of operations. We expect to fund this cost with available cash balances
and cash provided by operations.
Pinnacle West and its subsidiaries are communicating with their significant
suppliers, business partners, other utilities, and large customers to determine
the extent to which they may be affected by these third parties' plans to
remediate their own Year 2000 issues in a timely manner. These companies have
been interfacing with suppliers of 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 required services
and materials.
APS has also been working with NERC through the Western Systems Coordinating
Council (WSCC) to develop operational plans for stable grid operation that will
be utilized by APS and other utilities in the western United States. APS'
operational plans are complete. However, APS cannot currently predict the effect
on APS if the systems of these other companies are not Year 2000 ready.
We currently expect that our most reasonably likely worst case Year 2000
scenario would be intermittent loss of power to APS customers, similar to an
outage during a severe weather disturbance. In this situation, APS would restore
power as soon as possible by, among other things, re-routing power flows. We do
not currently expect that this scenario would have a material adverse effect on
our financial position, cash flows, or results of operations.
<PAGE>
-25-
Pinnacle West and its subsidiaries have developed their own contingency plans to
handle Year 2000 issues, including the most reasonably likely worst case
scenario discussed above. These plans were completed June 30, 1999.
COMPETITION AND ELECTRIC INDUSTRY RESTRUCTURING
See Note 5 for a discussion of regulatory accounting. See Note 6 for a
discussion of a proposed Settlement Agreement related to the implementation of
retail electric competition. See Note 8 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
during the first full year that the amendment is effective and by lesser annual
amounts during the next seven years.
RATE MATTERS
See Note 7 for a discussion of a proposed price reduction that would become
effective as of July 1, 1999. See Note 6 for a discussion of a proposed
Settlement Agreement that would, among other things, result in rate reductions
over a four year period ending July 1, 2003.
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; the
successful completion of a large-scale construction project; Year 2000 issues;
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 we
currently expect or seek.
ITEM 3. MARKET RISKS
Our operations include managing market risks related to changes in interest
rates, commodity prices, and investments held by the nuclear decommissioning
trust fund.
Our 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. Our policy is to manage
interest rates through the use of a combination of fixed and floating rate debt.
The nuclear decommissioning fund also
<PAGE>
-26-
has risks associated with changing market values of equity investments. Nuclear
decommissioning costs are recovered in rates.
APS is exposed to the impact of market fluctuations in the price and
distribution costs of electricity, natural gas, coal, and emissions and
therefore employs established procedures to manage its risks associated with
these market fluctuations by utilizing various commodity derivatives, including
exchange traded futures and options and over-the-counter forwards, options, and
swaps. As part of its overall risk management program, APS enters into these
derivative transactions for trading and to hedge certain natural gas in storage
as well as purchases and sales of electricity, fuels, and emissions.
APS measures the price risk in its commodity derivative portfolio on a daily
basis utilizing market sensitivity based modeling to understand expected and
potential single day favorable or unfavorable impacts to income before tax. The
model results are monitored daily to ensure compliance against thresholds on a
commodity and portfolio basis. As of June 30, 1999, a hypothetical adverse price
movement of 10% in the market price of APS' commodity derivative portfolio would
decrease the fair market value of these contracts by approximately $8 million.
This analysis does not include the favorable impact this same hypothetical price
move would have on the underlying position being hedged with the commodity
derivative portfolio.
APS is exposed to credit losses in the event of non-performance or non-payment
by counterparties. APS uses a credit management process to assess and monitor
the financial exposure of counterparties. APS does not expect counterparty
defaults to materially impact its financial condition, results of operations, or
net cash flows.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, the Navajo Nation served Salt River Project with a lawsuit naming
Salt River Project, several Peabody Coal Company entities ("Peabody"), Southern
California Edison Company, and other defendants, and citing various claims in
connection with the renegotiations of the coal royalty and lease agreements
under which Peabody mines coal for the Navajo and Mohave Generating Stations.
THE NAVAJO NATION V. PEABODY HOLDING COMPANY, INC., ET AL., United States
District Court for the District of Columbia, No. CA-99-0469-EGS. APS is a 14%
owner of Navajo Generating Station, which Salt River Project operates. The suit
alleges, among other things, that the defendants obtained a favorable coal
royalty rate by improperly influencing the outcome of a federal administrative
process under which the royalty rate was to be adjusted. The suit seeks $600
million in damages, treble damages, punitive damages of not less than $1
billion, and the ejection of defendants "from all possessory interests and
Navajo Tribal lands" arising out of the [primary coal lease]. Salt River Project
has advised APS that it denies all charges and will vigorously defend itself.
Because the litigation is in preliminary stages, APS cannot currently predict
the outcome of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At our annual Meeting of Shareholders held on May 19, 1999 the following
shareholder proposal was submitted to shareholders:
Abstentions
Votes Votes and Broker
For Against Non Votes
----- ------- -----------
Proposal that Pinnacle 2,413,519 63,160,240 2,955,431
West refuse to use
plutonium (MOX) fuel and
refuse to generate tritium
In addition, at the same annual meeting, the following persons were elected
Class II Directors with a term to expire at the 2002 annual meeting of
shareholders:
Abstentions
Votes Votes and Broker
For Withheld Non Votes
----- ------- -----------
Edward N. Basha 78,205,297 1,528,855 N/A
Michael L. Gallagher 78,246,095 1,488,057 N/A
William J. Post 78,396,955 1,337,197 N/A
<PAGE>
-28-
ITEM 5. OTHER INFORMATION
CONSTRUCTION AND FINANCING PROGRAMS
See "Liquidity and Capital Resources" in Part I, Item 2 of this report for a
discussion of APS' construction and financing programs.
COMPETITION AND ELECTRIC INDUSTRY RESTRUCTURING
See Note 6 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 and a proposed
settlement agreement with the ACC.
ENVIRONMENTAL MATTERS
As previously reported, in July 1997, EPA promulgated final national ambient air
quality standards for ozone and coarse and fine particulate matter. See
"Environmental Matters - EPA Environmental Regulation - Clear Air Act" in Part
I, Item 1 of the 1998 10-K. These standards were challenged and the court
determined that EPA's promulgation of the standards violated the constitutional
prohibition on delegation of legislative power. The court remanded the ozone
standard, vacated the coarse particulate matter standard, and invited the
parties to brief the court on vacating or remanding the fine particulate matter
standard. APS cannot currently predict EPA's response to this decision.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1(a) Key Executive Employment and Severance Agreement between
Pinnacle West and certain executive officers of Pinnacle West
and its subsidiaries
27.1 Financial Data Schedule
- ----------
(a) Additional agreements, substantially identical in all material respects to
this Exhibit have been entered into with additional officers of Pinnacle West
and its subsidiaries. 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.
<PAGE>
-29-
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>
10.1 Articles of Incorporation 19.1 to the Company's 1-8962 11-14-88
restated as of July 29, 1988 September 30, 1988
Form 10-Q Report
10.2 Bylaws, amended as of 3.1 to the Company's 1995 1-8962 4-1-96
February 21, 1996 Form 10-K Report
</TABLE>
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, and the period from July 1 through
August 16, 1999, we filed the following reports on Form 8-K:
Report dated March 22, 1999 relating to Pinnacle West's amended and
restated stockholder rights plan, effective March 26, 1999.
Report dated May 14, 1999 regarding the settlement agreement between APS
and various other parties, including representatives of major consumer groups,
related to the implementation of retail electric competition.
- ----------
(b) Reports filed under File No. 1-8962 were filed in the office of the
Securities and Exchange Commission located in Washington, D.C.
<PAGE>
-30-
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 16, 1999 By: George A. Schreiber, Jr.
------------------------------------
George A. Schreiber, Jr.
President and
Chief Financial Officer
(Principal Financial Officer
and Officer Duly Authorized
to sign this Report)
Exhibit 10.1
KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT
THIS AGREEMENT, made and entered into as of the _____ day of ____________,
1999, by and between Pinnacle West Capital Corporation, an Arizona corporation
(hereinafter referred to as the "Company") and __________________ (hereinafter
referred to as the "Executive"):
W I T N E S S E T H
WHEREAS, the Executive has been employed by ______________________________
("___"), in an executive capacity, possesses intimate knowledge of the business
and affairs of the Company and [Arizona Public Service Company, a subsidiary of
the Company ("APS")], and has acquired certain confidential information and data
with respect to the Company and APS;
WHEREAS, ___ and the Executive entered into a Key Executive Employment and
Severance Agreement (the "[prior] Agreement") on or about __________, 199__; and
WHEREAS, ___ intends to terminate the [prior] Agreement effective December
31, 1999; and
WHEREAS, however, the Company desires to insure, insofar as possible, that
APS and it will continue to have the benefit of the Executive's services and to
protect the confidential information and goodwill of the Company and APS; and
WHEREAS, the Company recognizes that circumstances may arise in which a
change in the control of the Company or APS through acquisition or otherwise
occurs thereby causing uncertainty of employment without regard to the
Executive's competence or past contributions which uncertainty may result in the
loss of valuable services of the Executive to the detriment of the Company, APS
and their shareholders, and the Company and the Executive wish to provide
reasonable security to the Executive against changes in the Executive's
relationship with the Company and APS in the event of any such change in
control; and
WHEREAS, both the Company and the Executive are desirous that a proposal
for any change of control or acquisition will be considered by the Executive
objectively and with reference only to the business interests of the Company,
APS and their shareholders;
WHEREAS, the Company recognizes that the Executive will be in a better
position to consider the best interests of the Company and APS if the Executive
is afforded reasonable security, as provided in this Agreement, against altered
conditions of employment which could result from any such change in control or
acquisition; and
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto mutually
covenant and agree as follows:
<PAGE>
1. Definitions.
(a) "Accrued Benefits" shall mean the benefits payable to the
Executive as described in Section 6(a).
(b) "Act" shall mean the Securities Exchange Act of 1934.
(c) "Affiliate" shall mean (i) a corporation other than the Company
that is a member of a "controlled group of corporations" (within the meaning of
Section 414(b) of the Code as modified by Section 415(h) of the Code) or (ii) a
group of trades or businesses under common control (within the meaning of
Section 414(c) of the Code as modified by Section 415(h) of the Code) that also
includes the Company as a member. For purposes of determining whether a
transaction or event constitutes a Change of Control within the meaning of
Section 1(f), "Affiliate" status shall be determined on the day immediately
preceding the date of the transaction or event.
(d) "Beneficial Owner" shall have the same meaning as given to that
term in Rule 13d-3 of the General Rules and Regulations of the Act, provided
that any pledgee of the voting securities of the Company or APS shall not be
deemed to be the Beneficial Owner thereof prior to its disposition of, or
acquisition of voting rights with respect to, such securities.
(e) "Cause" shall be limited to (i) the engaging by the Executive in
conduct which has caused demonstrable and serious injury to the Employer,
monetary or otherwise, as evidenced by a determination in a binding and final
judgment, order or decree of a court or administrative agency of competent
jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an
action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action, suit or proceeding, brought by the Company
or an Affiliate, the purpose of which is to establish "Cause" under this
Agreement; (ii) conviction of a felony, as evidenced by a binding and final
judgment, order or decree of a court of competent jurisdiction, in effect after
exhaustion or lapse of all rights of appeal, which the Employer determines has a
significant adverse impact on it in the conduct of its business; (iii)
unreasonable neglect or refusal by the Executive to perform the Executive's
duties or responsibilities (unless significantly changed without the Executive's
consent); or (iv) a significant violation by the Executive of the Employer's
established policies and procedures as in effect on the date of the Change of
Control which could subject the Executive to disciplinary action by the
Employer.
(f) "Change of Control" shall mean one (1) or more of the following
events:
(i) Any Person, other than an Affiliate, through a transaction or
series of transactions, is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company or APS representing twenty percent
-2-
<PAGE>
(20%) or more of the combined voting power of the then outstanding
securities of the Company or APS, as the case may be;
(ii) A merger or consolidation of (A) the Company with any other
corporation which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent thereof), in
combination with the ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or an Affiliate,
less than sixty percent (60%) of the combined voting power of the
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (B) APS with
any other corporation which would result in the voting securities of APS
outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity or any parent thereof), in
combination with the ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or an Affiliate,
less than sixty percent (60%) of the combined voting power of the
securities of APS or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation; provided that,
for purposes of this subparagraph (ii), a merger or consolidation effected
to implement a recapitalization of the Company or of APS (or similar
transaction) in which no Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company or of APS representing
twenty percent (20%) or more of the combined voting power of the then
outstanding securities of the Company or of APS (excluding any securities
acquired by that Person directly from the Company or an Affiliate) shall
not result in a Change of Control;
(iii) The shareholders of either the Company or APS approve a sale,
transfer or other disposition of all or substantially all of the assets of
either the Company or APS to a Person other than the Company or an
Affiliate; or
(iv) Individuals who, as of July 31, 1999, constitute the board of
directors of the Company (the "Company Incumbent Board") or of APS (the
"APS Incumbent Board") cease for any reason to constitute at least
two-thirds (2/3) of the members of the Company or APS board of directors,
as the case may be; provided, however, that for purposes of this
subparagraph (iv), (A)(1) any person becoming a member of the Company board
of directors after July 31, 1999 whose election, or nomination for election
by the Company's shareholders, was approved by a vote of at least
two-thirds (2/3) of the members then comprising the Company Incumbent Board
will be considered as though such person were a member of the Company
Incumbent Board and (2) the Company Incumbent Board shall not include a
director whose initial assumption of office as a director
-3-
<PAGE>
was in connection with an actual or threatened election contest relating to
the election of directors; and (B)(1) any person becoming a member of the
APS board of directors after July 31, 1999 whose election, or nomination
for election by APS' shareholder(s), was approved by a vote of at least
two-thirds (2/3) of the members then comprising the APS Incumbent Board or
by the Company, as a majority shareholder of APS, will be considered as
though such person were a member of the APS Incumbent Board and (2) the APS
Incumbent Board shall not include a director whose initial assumption of
office as a director was in connection with an actual or threatened
election contest relating to the election of directors.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(h) "Disability" shall have the same meaning as given to that term in
the applicable long-term disability plan maintained by the Company or the
Employer for employees.
(i) "Employer" shall mean ___, and upon the transfer of the Executive
to the Company or one of its other Affiliates, "Employer" shall mean the Company
or such other Affiliate.
(j) "Employment Period" shall mean the period commencing on the date
of a Change of Control and ending on the second anniversary of such date.
(k) "Good Reason" shall mean:
(i) the required relocation of the Executive, without the Executive's
consent, to an employment location which is more than seventy-five (75)
miles from the Executive's employment location on the date of the Change of
Control;
(ii) a significant reduction by the Employer in the compensation
and/or benefits provided to the Executive as in effect on the date of the
Change of Control (as the same may have been thereafter adjusted during the
Employment Period), which reduction is not generally effective for all
executives employed by the Employer (or its successor) in the Executive's
class or category;
(iii) the removal of the Executive from or any failure to re-elect the
Executive to any of the positions held by the Executive on the date of the
Change of Control or any other positions to which the Executive shall
thereafter be elected or assigned except in the event that such removal or
failure to re-elect relates to the termination by the Employer of the
Executive's employment for Cause or by reason of death, Disability or
voluntary retirement;
-4-
<PAGE>
(iv) a significant adverse change, without the Executive's written
consent, in the nature or scope of the Executive's authority, powers,
functions, duties or responsibilities, or a material reduction in the level
of support services, staff, secretarial and other assistance and office
space available to a level below that which was provided to the Executive
on the date of the Change of Control and that which is necessary to perform
any additional duties assigned to the Executive following the Change of
Control, which change or reduction is not generally effective for all
executives employed by the Employer (or its successor) in the Executive's
class or category; or
(v) breach of any material provision of this Agreement by the Company.
(l) "Person" shall mean any individual, partnership, joint venture,
association, trust, corporation or other entity (including a "group" as defined
in Section 13(d)(3) of the Act), other than an employee benefit plan of the
Company or an Affiliate or an entity organized, appointed or established
pursuant to the terms of any such benefit plan.
(m) "Termination Date" shall mean, except as otherwise provided in
Section 12, (i) the Executive's date of death; (ii) the date of the Executive's
voluntary early retirement as agreed upon in writing by the Employer and the
Executive; (iii) sixty (60) days after the delivery of the Notice of Termination
terminating the Executive's employment on account of Disability pursuant to
Section 9, unless the Executive returns full-time to the performance of his or
her duties prior to the expiration of such period; (iv) the date of the Notice
of Termination if the Executive's employment is terminated by the Executive
voluntarily other than for Good Reason; and (v) sixty (60) days after the
delivery of the Notice of Termination if the Executive's employment is
terminated by the Employer (other than by reason of Disability) or by the
Executive for Good Reason.
(n) "Termination Payment" shall mean the amount described in Section
6(b).
(o) "Total Payments" shall mean the sum of the Termination Payment and
any other payments or benefits provided to or for the benefit of the Executive
in the nature of compensation, receipt of which is contingent on the Change of
Control and to which Section 280G of the Code applies.
2. IMPACT ON EMPLOYMENT. The Employer and the Executive shall retain the
right to terminate the employment of the Executive at any time and for any
reason prior to a Change of Control. If a Change of Control occurs when the
Executive is employed by the Employer, the Employer will continue thereafter to
employ the Executive, and the Executive will remain in the employ of the
Employer, in accordance with the terms and provisions of this Agreement, during
the Employment Period.
-5-
<PAGE>
3. DUTIES. During the Employment Period, the Executive shall, in the same
capacities and positions held by the Executive at the time of such Change of
Control or in such other capacities and positions as may be agreed to by the
Employer and the Executive in writing, devote the Executive's best efforts,
attention and skill to the business and affairs of the Company, as such business
and affairs now exist and as they may hereafter be conducted. The services which
are to be performed by the Executive hereunder are to be rendered at an
employment location which is not more than seventy-five (75) miles from the
Executive's employment location on the date of the Change of Control, or in such
other place or places as shall be mutually agreed upon in writing by the
Executive and the Employer from time to time. The Executive shall not be
required to be absent from such employment location for more than forty-five
(45) consecutive days in any fiscal year without the Executive's consent.
4. COMPENSATION. During the Employment Period, the Executive shall be
compensated as follows:
(a) The Executive shall receive, at such intervals and in accordance with
such standard policies as may be in effect on the date of the Change
of Control, an annual salary not less than the Executive's annual
salary as in effect as of the date of the Change of Control, subject
to adjustment as provided in Section 5;
(b) The Executive shall be reimbursed, at such intervals and in accordance
with such standard policies as may be in effect on the date of the
Change of Control, for any and all monies advanced in connection with
the Executive's employment for reasonable and necessary expenses
incurred by the Executive on behalf of the Employer, including travel
expenses;
(c) The Executive shall be included to the extent eligible thereunder in
any and all plans providing general benefits for the Employer's
employees, including but not limited to, group life insurance,
disability, medical, dental, pension, profit sharing, savings and
stock bonus plans and be provided any and all other benefits and
perquisites made available to other employees of comparable status and
position, on the same terms and conditions as generally provided to
employees of comparable status and position;
(d) The Executive shall receive annually not less than the amount of paid
vacation and not fewer than the number of paid holidays received
annually immediately prior to the Change of Control or such greater
amount of paid vacation and number of paid holidays as may be made
available annually to other employees of comparable status and
position with the Employer; and
(e) The Executive shall be included in all plans providing special
benefits to corporate officers, including but not limited to bonus,
deferred compensation, incentive compensation, supplemental pension,
stock option, stock appreciation, stock bonus and similar or
comparable plans extended by the Company
-6-
<PAGE>
or the Employer from time to time to corporate officers, key employees
and other employees of comparable status.
5. ANNUAL COMPENSATION ADJUSTMENTS. During the Employment Period, the Board
of Directors of the Employer, an appropriate committee of the Board or the
President of the Employer, whichever is appropriate, shall consider and
appraise, at least annually, the Executive's compensation. In determining such
compensation, the Board, the appropriate committee thereof or the President,
whichever is appropriate, shall consider the commensurate increases given to
other corporate officers and key employees generally, the scope and success of
the Employer's operations, the expansion of Executive's duties and the
Executive's performance of his duties.
6. PAYMENTS UPON TERMINATION.
(a) ACCRUED BENEFITS. For purposes of this Agreement, the Executive's
Accrued Benefits shall include the following amounts: (i) all salary earned
or accrued through the Termination Date; (ii) reimbursement for any and all
monies advanced in connection with the Executive's employment for
reasonable and necessary expenses incurred by the Executive through the
Termination Date; (iii) any and all other cash benefits previously earned
through the Termination Date and deferred at the election of the Executive
or pursuant to any deferred compensation plans then in effect; (iv) a lump
sum payment of the bonus or incentive compensation otherwise payable to the
Executive under the terms of any bonus or incentive compensation plan or
plans for the year in which termination occurs; and (v) all other payments
and benefits to which the Executive may be entitled under the terms of any
benefit plan of the Company or the Employer. Payment of Accrued Benefits
shall be made promptly in accordance with the Employer's prevailing
practice and the terms of any applicable benefit plans, contracts or
arrangements.
(b) TERMINATION PAYMENT. For purposes of this Agreement, the
Executive's Termination Payment shall be an amount equal to (i) plus (ii),
multiplied by (iii), where
(i) Equals the Executive's rate of annual salary, as in effect on
the date of the Change of Control and as increased thereafter from
time to time pursuant to Section 5;
(ii) Equals the amount of the average annual dollar award paid to
the Executive pursuant to the Employer's regular bonus plan or
arrangement with respect to the four (4) years (or the number of years
of the Executive's employment if less than four (4) years) preceding
the Termination Date which shall be determined by dividing the total
dollar amount paid to the Executive under such plan or arrangement
with respect to such number of years by four (4) (or the number of
years of the Executive's employment if less than four (4) years); and
-7-
<PAGE>
(iii) Equals three (3).
The Termination Payment shall be payable in a lump sum on the
Executive's Termination Date. Such lump sum payment shall not be reduced by
any present value or similar factor. The Executive shall not be required to
mitigate the amount of such payment by securing other employment or
otherwise and such payment shall not be reduced by reason of the Executive
securing other employment or for any other reason, except as expressly
provided in Section 16.
7. DEATH. If the Executive shall die during the Employment Period, but
after delivery of a Notice of Termination by the Company (for reasons other than
Cause or Disability) or by the Executive for Good Reason, the Executive's
employment shall terminate on his or her date of death and the Executive's
estate shall be entitled to receive the Executive's Accrued Benefits as of the
Termination Date and, subject to the provisions of this Agreement, to such
Termination Payment as the Executive would have been entitled to had the
Executive survived. All benefits payable on account of the Executive's
employment or death under the Company's or Employer's employee benefits plans,
programs or arrangements shall be paid or distributed in accordance with the
terms of such plans, programs or arrangements. The Executive's death following
delivery of the Notice of Termination shall not affect his or her Termination
Date which shall be determined without regard to the Executive's death, subject
to the provisions of Section 12.
If the Executive shall die during the Employment Period, but prior to the
delivery of a Notice of Termination, the Executive's employment shall terminate
and the Executive's estate, heirs and beneficiaries shall receive all the
Executive's Accrued Benefits through the Termination Date and all benefits
available to them under the Company's benefit plans as in effect on the
Termination Date on account of the Executive's death.
8. RETIREMENT. If, during the Employment Period, the Executive and the
Employer shall execute an agreement providing for the voluntary retirement of
the Executive from the Employer, the Executive shall receive only his or her
Accrued Benefits through the Termination Date.
9. TERMINATION FOR DISABILITY. If the Executive has been absent from his or
her duties hereunder on a full-time basis for five (5) consecutive months during
the Employment Period on account of a Disability, the Employer may provide a
Notice of Termination, which satisfies the requirements of Section 12, and the
Executive's employment shall, for purposes of this Agreement, terminate sixty
(60) days thereafter, unless the Executive returns to the performance of his or
her duties on a full-time basis prior to the end of the sixty (60) day period.
During the term of the Executive's Disability prior to his or her Termination
Date, the Executive shall continue to participate in all compensation and
benefit plans, programs and arrangements in which the Executive was entitled to
participate immediately prior to his or her Disability in accordance with the
terms and provisions of such plans, programs and arrangements. If the
Executive's employment is terminated on account of the Executive's Disability,
the Executive shall
-8-
<PAGE>
receive his or her Accrued Benefits in accordance with Section 6(a) hereof,
provided that the Executive's termination for purposes of this Agreement under
this Section 9 shall not affect his or her entitlement to benefits on account of
his or her Disability under any long-term disability programs of the Company or
the Employer in effect at the time of such termination and in which the
Executive participated immediately prior to his or her Disability.
10. TERMINATION NOT GIVING RISE TO A TERMINATION PAYMENT. If, during the
Employment Period, the Executive's employment is terminated for Cause, or if the
Executive voluntarily terminates his or her employment other than for Good
Reason, subject to the procedures set forth in Section 12, the Executive shall
be entitled to receive only his or her Accrued Benefits in accordance with
Section 6(a).
11. TERMINATION GIVING RISE TO A TERMINATION PAYMENT. If, during the
Employment Period, the Executive's employment is terminated by the Executive for
Good Reason or by the Employer other than by reason of death, Disability
pursuant to Section 9 or Cause, subject to the procedures set forth in Section
12,
(a) the Executive shall be entitled to receive and the Company or the
Employer, as applicable, shall pay the Executive's Accrued Benefits in
accordance with Section 6(a) and, in lieu of further salary payments for
periods following the Termination Date, as severance pay, a Termination
Payment;
(b) the Executive and his eligible dependents shall continue to be
covered for three (3) years, under the same terms and conditions, by the
medical plan, dental plan and/or group life insurance plan maintained by
the Company or the Employer which covered that Executive and his eligible
dependents prior to the Executive's Termination Date. Notwithstanding the
foregoing, if the Company's or Employer's medical plan, dental plan and/or
group life insurance plan covering the Executive on his or her Termination
Date was amended, replaced or terminated on or after the Change of Control
and such action would constitute Good Reason within the meaning of Section
1(k), the Executive and his or her eligible dependents shall be entitled to
continued coverage for purposes of this Section 11(b) under the terms of
the medical plan, dental plan and/or group life insurance plan which they
participated in immediately prior to the Change of Control. If the affected
plan is no longer available, the Company shall make arrangements to provide
equivalent coverage to the Executive and his or her eligible dependents.
For this purpose, "equivalent coverage" shall mean medical, dental and/or
life insurance coverage, which, when added to the coverage provided to the
Executive and his or her eligible dependents under the Company's or
Employer's medical plan, dental plan and/or group life insurance plan in
effect on the Executive's Termination Date, equals or exceeds the level of
benefits provided under the medical plan, dental plan and/or group life
insurance plan to the Executive and his or her eligible dependents on the
day immediately preceding the Change of Control. The Executive and the
Employer shall share the cost of the continued coverage under this Section
11(b) in the same proportions as the Employer and similarly situated active
employees shared the cost of such cover-
-9-
<PAGE>
age on the day preceding the Executive's Termination Date. For purposes of
satisfying the Company's or Employer's obligation under the Consolidated
Omnibus Budget Reconciliation Act ("COBRA") to continue group health care
coverage to the Executive and his eligible dependents as a result of the
Executive's termination of employment, the period during which the
Executive is permitted to continue to participate in the Company's or
Employer's medical plans and/or dental plans under this Section 11(b) shall
not be taken into account and treated as part of the period during which
the Executive and his eligible dependents are entitled to continued
coverage under the Company's or Employer's group health plans under COBRA.
Following the end of the continuation period specified in this Section
11(b), the Executive and his eligible dependents shall be covered under
such plans and arrangements only as required under the provisions of COBRA;
(c) the Executive's termination shall be treated as a "Normal
Termination" as defined in the Pinnacle West Capital Corporation Stock
Option and Incentive Plan, as amended from time to time, and in any
successor plan thereto, which shall entitle the Executive to exercise any
outstanding stock options during the three (3) month period beginning on
the Executive's Termination Date, and any restrictions remaining on any
"Restricted Stock" (as defined in such plan) awarded to the Executive shall
lapse on his or her Termination Date;
(d) "out-placement" services will be provided by the Company to the
Executive for a period beginning on the Executive's Termination Date. Such
services shall be provided for a period beginning on the Executive's
Termination Date and ending on the earlier of the date on which the
Executive becomes employed in a position commensurate with his or her
current salary and responsibilities or the last day of the twelve (12)
month period which began on the Executive's Termination Date. The
"out-placement" services shall be provided by an out-placement company
selected by the Company; and
(e) if all or any part of the Total Payments made to the Executive
would be subject to the excise tax imposed by Section 4999 of the Code and
if any interest or penalties are incurred by the Executive with respect to
such excise tax (such excise tax, together with any such interest and
penalties, being collectively referred to hereinafter as the "Excise Tax"),
the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the Executive
of all taxes (including, without limitation, any income taxes and the
Excise Tax, and any interest or penalties imposed with respect to such
taxes), on the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments.
All determinations required to be made under this Section 11(e), including
whether a Gross-Up Payment is required and the amount of such Gross-Up
Payment, shall be made by a nationally recognized independent accounting
firm selected by the Company (the "Accounting Firm") which shall provide
detailed supporting calculations to the Company and the Executive within
fifteen (15) business days following the Termination Date, if applicable,
or such
-10-
<PAGE>
earlier time as the Company may request. All fees and expenses of the
Accounting Firm shall be borne by the Company. The Gross-Up Payment, if
any, as determined pursuant to this Section 11(e) shall be paid to the
Executive within five (5) days following receipt by the Company of the
Accounting Firm's determination. If the Accounting Firm shall determine
that the Total Payments are not subject to the Excise Tax and, therefore no
Gross-Up Payment is required, it shall furnish the Executive with an
opinion that failure to report the Excise Tax on the Executive's applicable
Federal income tax return would not result in the imposition of a
negligence or similar penalty. Any determination by the Accounting Firm
shall be binding upon the Company and the Executive.
12. TERMINATION NOTICE AND PROCEDURE. Any termination by the Employer or
the Executive of the Executive's employment during the Employment Period shall
be communicated by written Notice of Termination to the Executive if such Notice
is delivered by the Company and to the Company if such Notice is delivered by
the Executive, all in accordance with the following procedures:
(a) The Notice of Termination shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances alleged to provide a basis for
termination.
(b) Any Notice of Termination by the Company shall be approved by a
resolution duly adopted by a majority of the members of the Company's board
of directors then in office.
(c) If the Company shall give a Notice of Termination for Cause or by
reason of Disability and the Executive in good faith notifies the Company
that a dispute exists concerning such termination within the fifteen (15)
day period following the Executive's receipt of such notice, the Executive
may elect to continue his or her employment during such dispute. If it is
thereafter determined that (i) the reason given by the Company for
termination did exist, the Executive's Termination Date shall be the
earlier of (A) the date on which the dispute is finally determined, either
by mutual written agreement of the parties or pursuant to Section 14, (B)
the date of the Company's Notice of Termination for Cause, (C) the date of
the Executive's death, or (D) one day prior to the end of the Employment
Period, and the Executive shall not be entitled to a Termination Payment
based on events occurring after the Company delivered its Notice of
Termination; or (ii) the reason given by the Company for termination did
not exist, the employment of the Executive shall continue as if the Company
had not delivered its Notice of Termination and there shall be no
Termination Date arising out of such notice.
(d) If the Executive shall in good faith give a Notice of Termination
for Good Reason and the Company notifies the Executive that a dispute
exists concerning the termination within the fifteen (15) day period
following the Company's receipt of such notice, the Executive may elect to
continue his or her employment during such dispute. If it is thereafter
determined that (i) Good Reason did exist, the Executive's Termination Date
shall be the earlier of (A) the date on which the
-11-
<PAGE>
dispute is finally determined, either by mutual written agreement of the
parties or pursuant to Section 14, (B) the date of the Executive's death,
or (C) one day prior to the end of the Employment Period, and the
Executive's Termination Payment shall reflect events occurring after the
Executive delivered his or her Notice of Termination; or (ii) Good Reason
did not exist, the employment of the Executive shall continue after such
determination as if the Executive had not delivered the Notice of
Termination asserting Good Reason.
(e) If the Executive does not elect to continue employment pending
resolution of a dispute regarding a Notice of Termination under Sections
12(c) and (d), and it is finally determined that the reason for termination
set forth in such Notice of Termination did not exist, if such notice was
delivered by the Executive, the Executive will be deemed to have
voluntarily terminated his or her employment and if delivered by the
Company, the Company will be deemed to have terminated the Executive other
than by reason of death, Disability or Cause.
13. OBLIGATIONS OF THE EXECUTIVE. The Executive covenants and agrees,
during the Executive's employment with the Employer and following his or her
Termination Date, to hold in strict confidence any and all information in the
Executive's possession as a result of the Executive's employment with the
Employer; provided that nothing in this Agreement shall be construed as
prohibiting the Executive from reporting any suspected instance of illegal
activity of any nature, any nuclear safety concern, any workplace safety concern
or any public safety concern to the United States Nuclear Regulatory Commission,
United States Department of Labor or any federal or state governmental agency or
prohibiting the Executive from participating in any way in any state or federal
administrative, judicial or legislative proceeding or investigation with respect
to any such claims and matters.
14. ARBITRATION. All claims, disputes and other matters in question between
the parties arising under this Agreement, other than Section 13, shall be
decided by arbitration in accordance with the commercial arbitration rules of
the American Arbitration Association, unless the parties mutually agree
otherwise. Any arbitration required under this Agreement shall be held in
Phoenix, Arizona, unless the parties mutually agree otherwise. The Company shall
pay the costs of any such arbitration. The award by the arbitrator shall be
final, and judgment may be entered upon it in accordance with applicable law in
any state or Federal court having jurisdiction thereof.
The Company shall not be required to arbitrate claims arising under Section
13. The Company shall have the right to judicial enforcement of its rights under
Section 13, including, but not limited to, injunctive relief.
15. EXPENSES AND INTEREST. If, after a Change of Control a good faith
dispute arises with respect to the enforcement of the Executive's rights under
this Agreement or if any arbitration or legal proceeding shall be brought in
good faith to enforce or interpret any provision contained herein, or to recover
damages for breach hereof and the Executive is the prevailing party, the
Executive shall recover from the Company any reasonable attorney's fees and
necessary costs and disbursements in-
-12-
<PAGE>
curred as a result of such dispute or legal proceeding, and prejudgment interest
on any money judgment obtained by the Executive calculated at the rate of
interest announced by Bank One of Arizona (or any successor thereto) from time
to time as its prime rate from the date that payments to the Executive should
have been made under this Agreement.
16. PAYMENT OBLIGATIONS ABSOLUTE. The Company's obligation during and after
the Employment Period to insure that the compensation and arrangements provided
herein are provided to the Executive shall be absolute and unconditional and
shall not be affected by any circumstances, provided that the Company may apply
amounts payable under this Agreement to any loans or other debts then owed to
the Company or an Affiliate by the Executive, the terms of which are reflected
in a written document signed by the Executive. The amounts payable under this
Agreement shall be in lieu of any amounts payable to the Executive under a
separate severance plan, agreement or arrangement established by the Company.
All amounts payable by the Company under this Agreement shall be paid without
notice or demand. Each and every payment made under this Agreement by the
Company shall be final. Notwithstanding the foregoing, in the event that the
Company has paid an Executive more than the amount to which the Executive is
entitled under this Agreement, the Company shall have the right to recover all
or any part of such overpayment from the Executive or from whomsoever has
received such amount.
17. SUCCESSORS.
(a) If all or substantially all of the Company's business and assets
are sold, assigned or transferred to any Person, or if the Company merges
into or consolidates or otherwise combines with any Person which is a
continuing or successor entity, then the Company shall assign all of its
right, title and interest in this Agreement as of the date of such event to
the Person which is either the acquiring or successor corporation, and such
Person shall assume and perform from and after the date of such assignment
the terms, conditions and, provisions imposed by this Agreement upon the
Company. Failure of the Company to obtain such assignment shall be a breach
of this Agreement. In case of such assignment by the Company and of
assumption and agreement by such Person, all further rights as well as all
other obligations of the Company under this Agreement thenceforth shall
cease and terminate and thereafter the expression "the Company" wherever
used herein shall be deemed to mean such Person(s).
(b) This Agreement and all rights of the Executive shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, estates, executors, administrators, heirs and
beneficiaries. In the event of the Executive's death, all amounts payable
to the Executive under this Agreement shall be paid to the Executive's
estate. This Agreement shall inure to the benefit of, be binding upon and
be enforceable by, any successor, surviving or resulting corporation or
other entity to which all or substantially all of the Company's business
-13-
<PAGE>
and assets shall be transferred whether by merger, consolida- tion,
transfer or sale. This Agreement shall not be terminated by the voluntary
or involuntary dissolution of the Company.
18. ENFORCEMENT. The provisions of this Agreement shall be regarded as
divisible, and if any of said provisions or any part hereof are declared invalid
or unenforceable by a court of competent jurisdiction, the validity and
enforceability of the remainder of such provisions or parts hereof and the
applicability thereof shall not be affected thereby.
19. AMENDMENT OR TERMINATION. The term of this Agreement shall run until
December 31, 2001, and shall continue for additional one (1) year periods
thereafter, unless the Company notifies the Executive in writing six (6) months
prior to December 31, 2001 (or the anniversary of that date in the event the
Agreement continues beyond that date pursuant to the provisions of this Section
19) that it does not intend to continue the Agreement. Notwithstanding the
foregoing, (i) if a Change of Control has occurred on or before the date on
which the Agreement would be terminated by the Company in accordance with this
Section 19, the Agreement shall not terminate with respect to that Change of
Control until the end of the Employment Period, and (ii) this Agreement shall
terminate if, prior to a Change in Control, the Executive ceases to be employed
by the Employer as a corporate officer.
This Agreement sets forth the entire agreement between the Executive and
the Company and any of its Affiliates with respect to the subject matter hereof,
and supersedes all prior oral or written negotiations, commitments,
understandings and writings with respect thereto, including, but not limited to,
the Key Executive Employment and Severance Agreement by and between the Employer
and the Executive executed on or about __________, 19__.
This Agreement may not be terminated, amended or modified during its term
as specified above except by written instrument executed by the Company and the
Executive.
20. WITHHOLDING. The Company and the Employer shall be entitled to withhold
from amounts to be paid to the Executive under this Agreement any federal, state
or local withholding or other taxes or charges which it is from time to time
required to withhold. The Company and the Employer shall be entitled to rely on
an opinion of counsel if any question as to the amount or requirement of any
such withholding shall arise.
21. VENUE; GOVERNING LAW. This Agreement and the Executive's and Company's
respective rights and obligations hereunder shall be governed by and construed
in accordance with the laws of the State of Arizona. Any action concerning this
Agreement shall be brought in the Federal or state courts located in the County
of Maricopa, Arizona, and each party consents to the venue and jurisdiction of
such courts.
-14-
<PAGE>
22. NOTICE. Notices given pursuant to this Agreement shall be in writing
and (a) if hand delivered, shall be deemed given when delivered, and (b) if
mailed, shall be deemed delivered when placed in the United States mail, postage
prepaid, addressed,
if to the Company, to
Board of Directors
Pinnacle West Capital Corporation
400 North Fifth Street
Phoenix, Arizona 85004
Attention: Law Department
or if to the Executive, to
--------------------
--------------------
--------------------
or to such other addresses as the parties may provide written notice of to each
other, from time to time, in accordance with this Section 22.
23. FUNDING. Benefits payable under this Agreement shall constitute an
unfunded general obligation of the Company payable from its general assets, and
the Company shall not be required to establish any special fund or trust for
purposes of paying benefits under this Agreement. The Executive shall not have
any vested right to any particular assets of the Company as a result of
execution of this Agreement and shall be a general creditor of the Company.
24. NO WAIVER. No waiver by either party at any time of any breach by the
other party of, or compliance with, any condition or provision of this Agreement
to be performed by the other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same time or any prior or subsequent
time.
25. HEADINGS. The headings contained are for reference only and shall not
affect the meaning or interpretation of any provision of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer, and the Executive has executed this Agreement, on
the date and year first above written.
Pinnacle West Capital Corporation
By
------------------------------
Its
-----------------------------
-15-
<PAGE>
ATTEST:
By
--------------------------
Its
-------------------------
-16-
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,727,330
<OTHER-PROPERTY-AND-INVEST> 598,563
<TOTAL-CURRENT-ASSETS> 464,944
<TOTAL-DEFERRED-CHARGES> 1,013,384
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,804,221
<COMMON> 1,540,437
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 629,444
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,169,881
0
0
<LONG-TERM-DEBT-NET> 2,164,459
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 223,950
<LONG-TERM-DEBT-CURRENT-PORT> 17,810
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,228,121
<TOT-CAPITALIZATION-AND-LIAB> 6,804,221
<GROSS-OPERATING-REVENUE> 982,647
<INCOME-TAX-EXPENSE> 64,610
<OTHER-OPERATING-EXPENSES> 510,296
<TOTAL-OPERATING-EXPENSES> 742,080
<OPERATING-INCOME-LOSS> 240,567
<OTHER-INCOME-NET> (2,954)
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 73,611
<NET-INCOME> 99,392
0
<EARNINGS-AVAILABLE-FOR-COMM> 99,392
<COMMON-STOCK-DIVIDENDS> 82,653
<TOTAL-INTEREST-ON-BONDS> 55,936
<CASH-FLOW-OPERATIONS> 330,176
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.17
</TABLE>
